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BUSINESS 

FORECASTING 


BY 

DAVID  F.  JORDAN,  B.C.S. 

ASSISTANT  PROFESSOR  OF  FINANCB 
NEW  YORK  UNIVERSITY 

Author  of  "Jordan  on  Investments" 


44390 


New  York 

PRENTICE-HALL,  Inc. 

1921 


Copyright,  1921,  by 
Prentice-Hall,  Inc. 


H 


TO  THE  MEMORY  OF 

LIEUTENANT  ORLANDO  BURNUM  COLLINS,  JR. 

COMPANY  L,  3O9TH  INFANTRY,  U.  S.  A. 

KILLED  IN  ACTION 

ST.  JUVIN,  ARGONNE  FOREST 

OCTOBER  l6,   19 I 8 


INTRODUCTION 

"The  end'  and  aim  of  all  science,"  stated  Professor  Jacques 
Loeb,  "is  the  prediction  and  control  of  phenomena."     The  un- 
certainty which  attends  the  outcome  of  business  transactions 
offers  a  wide  field  for  scientific  research.    It  is  indeed  surprising 
to  note  how  little  science  has  done  toward  reducing  the  element 
of  risk  in  commerce  in  comparison  with  achievements  in  the 
4  search  for  the  unknown  in  geography,  astronomy,  medicine, 
^  and  other  fields.     The  age-old  belief  that  business  affairs  were 
unworthy  of  study  has  too  long  blocked  commercial  progress. 
The  future  will  always  contain  a  large  degree  of  uncertainty 
but  the  major  changes  in  business  conditions  can  be  foreseen  if 
*    basic  economic  laws  are  known.     The  most  harmful  effects  of 
V  changing  conditions  are  due  to  ignorance  of  these  laws.     "The 
forces  that  primarily  cause  the  alternation  of  boom  and  depres- 
sion," stated  Professor  M.  T.  Copeland  recently,  "can  be  regu- 
lated once  they  are  understood.    The  severity  of  these  ups  and 
downs  is  due  in  large  measure  to  the  lack  of  adequate  foresight, 
lack  of  general  appreciation  of  the  factors  that  influence  the 
course  of  business  prosperity,  and  failure  to  adopt  corrective 
policies   in   season."      Scientific   research   into   the   underlying 
i  causes  of  changes  in  business  conditions  has  only  just  begun. 
*3       "Stabilization  of  business  and  the  avoidance  of  recurring 
»  depressions  and  crises,"  declared  the  Economic  Advisory  Com- 
mittee of  the  National   Conference   on  Unemployment  held 
recently  at  Washington,  "are  in  no  small  measure  dependent 
upon  a  more  complete  knowledge  of  the  factors  affecting  the 
business  situation." 

To  the  business  man,  the  importance  of  being  at  all  times 
acquainted  with  current  conditions,  outside  as  well  as  within 
his  particular  field,  can  scarcely  be  overestimated.  Future  poli- 
cies cannot  be  wisely  decided  unless  future  economic  probabili- 
ties are  carefully  analyzed,  and  such  analysis  is  impossible 
without  adequate  statistics  of  existing  conditions. 

To  the  theoretical  economist,  the  importance  of  knowing 
beforehand  the  relative  strength  of  demand  and  supply  has 
long  been  recognized.  Indeed  the  economists  have  pointed  out 
that  the  maladjustment  between  demand  and  supply  has  been 


VI 


INTRODUCTION 


one  of  the  chief  sources  of  business  profits.  And  since  profits 
flowing  from  this  source  have  usually  been  accidental  they 
have  been  given  the  name  of  "conjunctural  profits"  to  dis- 
tinguish them  from  the  so-called  "pure  profits,"  which  arise 
from  differences  in  efficiency  among  competitors. 

Recent  commercial  history  has  served  to  emphasize  the  in- 
fluence of  conjunctural  profits.  From  statistics  of  American 
industrial  earnings  during  the  years  1916  to  1919  compiled  by 
Professor  David  Friday,  the  following  table  has  been  obtained. 


Type 

V 

V 

s 

a 

12 

9 

18 

26 

Textiles    .... 

Rubber    

Iron  and  steel 
Copper   

All     i  n  d  u  s- 
trials     .... 

259 

$45  265 

79  203 

197  45 

42  15 


$1,371   83 


1918 


$32  188 

66  169 

553  125 

130  45 


$1,819  110 


1917 


$25  147 

55  141 

711  161 

210  73 


$2,052  124 


1916 


$17  100 

39  100 

442  100 

286  100 


$1,652  100 


The  surprising  lack  of  uniformity  in  the  trend  of  industrial 
earnings  during  the  specified  years  emphasizes  the  fact  that 
under  our  present  organization  external  conditions  exert  a  more 
potent  influence  over  company  profits  than  do  internal  condi- 
tions. For  259  companies,  net  earnings  in  1919  were  83  per 
cent  of  net  earnings  in  1916.  But  profits  of  textile  and  rubber 
companies  were  respectively  165  and  103  per  cent  greater  in 
1919  than  in  1916,  whereas  earnings  of  iron  and  copper  com- 
panies were  respectively  55  and  85  per  cent  less.  The  wide 
variance  is  due  not  to  differences  in  technical  or  managerial 
skill  in  the  several  industries,  but  to  changes  in  the  relative 
demand  and  supply  of  the  products  manufactured. 

If  the  man  in  business  is  to  realize  the  larger  rewards  which 
commerce  offers,  it  is  imperative  that  he  have  a  broad  knowl- 
edge of  current  economic  developments.  The  gains  which 
come  from  ability  to  foresee  the  trend  of  general  conditions — 
conjunctural  profits — far  exceed  the  margin  of  pure  profits 
which  competition  holds  within  narrow  limits.  To  enable  the 
business  man,  as  well  as  the  student  of  commercial  affairs,  to 
secure  a  working  knowledge  of  the  fundamental  factors  which 
influence  changing  business  conditions,  and  to  utilize  this 
knowledge  to  foresee  future  developments — to  the  end  that 


INTRODUCTION  vii 

profits  may  be  enhanced  and  losses  avoided — is  the  purpose  of 

this  book. 

****** 

In  the  compilation  of  the  present  volume,  many  sources  of 
information  were  utilized,  and  in  each  instance  an  endeavor  has 
been  made  to  show  proper  credit.  The  author  acknowledges  his 
indebtedness  for  this  assistance  without  which  the  work  would 
be  indeed  incomplete.  Special  acknowledgment  is  due  Mr. 
Arthur  Hunter,  F.F.A.,  F.A.S.,  Ex-President  of  the  Actuarial 
Society  of  America,  for  life  insurance  statistics;  Mr.  James  H. 
Scarr,  meteorologist  in  charge  of  the  United  States  Weather 
Bureau  office  in  New  York  City,  for  weather  reporting  sta- 
tistics; Mr.  Nat  C.  Murray,  Chief  of  the  Bureau  of  Crop 
Estimates,  for  crop  reporting  statistics;  the  Committee  on 
Economic  Research  of  Harvard  University  for  the  use  of  the 
charts  which  show  the  trend  of  pig  iron  production  corrected 
for  secular  trend  and  seasonal  variation;  Mr.  Raymond  E. 
Bagley  and  Mr.  Arthur  M.  Shackleton  for  the  preparation  of 
the  charts  in  the  present  volume;  and  Miss  Lillian  Doris  for 
assistance  in  indexing  and  proofreading.  To  Professor  Charles 
W.  Gerstenberg  of  New  York  University,  at  whose  sugges- 
tion the  present  volume  was  written  and  who  has  rendered 
immeasurable  assistance  in  its  preparation,  is  especially  due  the 
sincere  appreciation  of  the  author. 

David  F.  Jordan. 
New  York  University 

October,   1921 


CONTENTS 

PART  I 
THE  RELATION  OF  FORECASTING  TO  BUSINESS 

CHAPTER  I 

Practical  Forecasting 


PAGE 


Foresight  in  business. — Possibility  of  accurate  forecasting. — Mathematics 
of  probabilities.  —  Life  insurance  forecasting.  —  Weather  forecasts. — 
Census  forecasting. — National  budget  estimates. — Crop  forecasting. — 
Summary        3 

CHAPTER  II 

The  Business  Cycle 

The  integral  aspect  of  business. — The  stages  of  business. — Characteristics 
of  a  period  of  depression. — Production  during  a  period  of  depression. — 
Marketing  during  a  period  of  depression. — Conditions  of  corporate  pros- 
perity during  a  period  of  depression. — Labor  conditions  during  a  period 
of  depression. — Conditions  of  finance  during  a  period  of  depression. — 
The  recovery  of  business  activity. — Production  during  a  period  of  recov- 
ery.— Marketing  during  a  period  of  recovery. — Labor  conditions  during 
a  period  of  recovery. — Conditions  of  corporate  prosperity  during  a 
period  of  recovery. — Conditions  of  finance  during  a  period  of  recovery  .       20 

CHAPTER  III 

The  Business  Cycle  (Continued) 

The  development  of  the  period  of  prosperity. — Production  during  a  period 
of  prosperity. — Marketing  during  a  period  of  prosperity. — Labor  condi- 
tions during  a  period  of  prosperity. — Conditions  of  corporate  prosperity 
during  a  period  of  prosperity. — Conditions  of  finance  during  a  period 
of  prosperity. — The  beginning  of  retrogression. — Panics  and  crises. — 
Production  during  a  period  of  retrogression. — Marketing  during  a  period 
of  retrogression. — Labor  conditions  during  a  period  of  retrogression. — 
Conditions  of  corporate  prosperity  during  a  period  of  retrogression. — 
Conditions  of  finance  during  a  period  of  retrogression. — The  complete 
cycle 33 

CHAPTER  IV 

The  Influence  of  a  Money  Economy 

The  effect  of  a  money  economy. — Subordination  of  production. — An  an- 
alysis of  price. — Effect  of  cost  of  production. — Factors  in  price  deter- 
mination.— Estimating  the  demand. — Effect  of  purchasing  position. — 
Regulating  the  supply. — Limitations  upon  supply. — Prospective  cost  of 
production. — Effect  upon  price. — Why  prices  rise. — Relationship  of 
credit. — Effect  of  changes  in  demand. — Why  depression  ensues. — Sum- 
mary      44 


x  CONTENTS 

PART  II 
THE  BAROMETERS  OF  BUSINESS 

CHAPTER  V 
Barometers  of  Agriculture 

PAGE 

The  barometers  of  production. — Agricultural  production. — Government 
crop  reports. — Dates  of  issuance. — Agricultural  production:  Corn. — 
Acreage,  condition,  yield. — Wheat. — Acreage,  condition,  yield. — Cot- 
ton.— Acreage,  condition,  yield. — Relation  of  acreage  to  production. — 
Analysis  of  Federal  estimates. — Agricultural  production  as  a  business 
barometer 59 

CHAPTER  VI. 

Barometers  of  Industrial  Production 

Industrial  production. — Iron  and  steel. — Coal. — Raw  material  imports. — 
Sources  of  information. — Secular  trend  and  seasonal  variation. — Indus- 
trial production  as  a  business  barometer. — Structural  production. — A 
general  index  of  industrial  production 83 

CHAPTER  VII 

Barometers  of  Marketing 

The  second  major  function  of  business. — Commodity  prices. — American 
index  numbers. — Bradstreet's  index. — Department  of  Labor  index. — Price 
fluctuations. — The  price  decline  in  1920-1921. — Relationship  of  farm 
product  prices  to  general  prices. — Commodity  prices  as  a  business  ba- 
rometer.— Commodity  shipments. — Transportation  of  merchandise. — Car 
loadings. — Idle  cars. — Commodity  shipments  as  a  business  barometer. — 
Foreign  trade. — New  conditions  in  foreign  trade. — Foreign  trade  of  the 
United  States. — Merchandise  exports. — Effect  upon  domestic  industry. — 
Merchandise  imports. — Balance  of  trade. — Foreign  trade  a  business  ba- 
rometer.— Retail  sales. — Index  of  current  purchasing  power. — Volume  of 
sa]es. — The  Federal  Reserve  statement  of  retail  sales. — Retail  sales  as  a 
business  barometer 99 

CHAPTER  VIII 

Barometers  of  Labor  Conditions 

Employment. — The  problem  of  employment. — Effect  of  changing  business 
conditions. — Employment  conditions  as  a  business  barometer. — Wages. — 
The  trend  of  wages. — Peculiarities  of  the  trend  in  wages. — The  trend  of 
wages  and  prices. — Wages  as  a  barometer  of  business. — Industrial  con- 
troversies.— Periodicity  of  controversies. — Strike  compilations. — Indus- 
trial controversies  as  a  business  barometer. — Migration. — Immigration 
and  emigration. — Effect  upon  industrial  conditions. — Immigration  as  a 
business    barometer. — Restrictive    Act   of    1921     ........     137 

CHAPTER  IX 

Barometers  of  Business  Profits 

Barometers  of  prosperity. — Corporate  earnings. — Information  available. — 
Railroad  earnings. — Public  utility  earnings. — Industrial  earnings. — Divi- 


CONTENTS  xi 

PACE 

dcnd  payments. — Corporate  earnings  as  a  business  barometer. — Business 
failures. — Causes  of  business  failures. — The  trend  of  commercial  fail- 
ures.— Relationship  between  the  number  of  failures  and  the  amount  of 
liabilities. — Relationship  between  the  number  of  failures  and  the  number 
of  firms  in  business. — Commercial  failures  as  a  business  barometer. — 
New  security  issues. — Financial  policy  of  corporations. — Nature  of  is- 
sues.— Reflection  of  general  prosperity. — New  security  issues  as  a  busi- 
ness barometer 151 

CHAPTER  X 

Barometers  of  the  Exchanges 

Function  of  the  exchanges. — Relation  of  the  individual  opinion  to  the 
majority  opinion. — The  stock  exchanges. — Volume  of  transactions. — 
Stock  exchange  prices. — Industrial  stock  prices  are  most  significant. — The 
stock  exchange  as  a  business  barometer. — The  commodity  exchanges. — 
Nature  of  transactions. — Commodity  exchanges  as  business  barometers. — 
Foreign  exchanges. — Function  of  foreign  exchange. — Effect  upon  domes- 
tic conditions. — Causes  of  fluctuations  in  foreign  exchanges. — Foreign 
exchange  as  a  business  barometer 164 

CHAPTER  XI 

Barometers  of  Finance 

Bank  clearings. — Meaning  of  the  term. — Significance  of  New  York  City 
clearings. — Barometric  limitations. — The  Federal  Reserve  clearing  sys- 
tem.— Bank  clearings  as  a  business  barometer. — Bank  statements. — 
Classification. — Relative  importance. — The  weekly  Federal  Reserve 
statement. — Cash  reserves. — Bills  discounted. — Member  bank's  reserve 
account. — Federal  Reserve  notes  in  circulation. — Reserve  ratio. — Sig- 
nificance of  changes  in  reserve  ratio. — District  reserve  ratios. — Panics 
and  the  Federal  Reserve  system. — Reporting  member  bank  statements. — 
National  bank  statements. — Bank  statements  as  a  business  barometer. — 
Interest  rates. — The  difference  in  rates. — The  Federal  Reserve  discount 
rate. — The  market  rate. — Call  money  rates. — Interest  rates  as  a  business 
barometer.  —  Gold  movements.  —  The  normal  flow  of  gold.  —  Gold 
movements  since  1914. — New  gold  production. — Gold  movements  as  a 
business  barometer. — Federal  fiscal  operations. — The  relation  of  Gov- 
ernment to  business. — The  possibility  of  tax  reduction. — Federal  maturi- 
ties.— Fiscal  operations  as  a  business  barometer 188 

CHAPTER  XII 

Barometric  Summary 

Business  barometers  in  general. — Interrelationship  of  business  forces. — 
The  fallibility  of  commercial  barometers. — Business  barometers  as 
causes  and  effects. — Summary  of  the  barometers  of  production. — Sum- 
mary of  the  barometers  of  marketing. — Summary  of  the  barometers  of 
labor  conditions. — Summary  of  the  barometers  of  business  profits. — 
Summary  of  the  barometers  of  the  exchanges. — Summary  of  the  ba- 
rometers of  finance. — Barometric  ranking. — Composite  barometers. — The 
Harvard  index  of  general  business  conditions. — The  "Annalist"  ba- 
rometer and  business  index  line. — New  barometers,  actual  and  prospec- 
tive.— Future  barometric  progress 225 


xii  CONTENTS 

PART  III 
BUSINESS  CRISES  IN  THE  UNITED  STATES 

CHAPTER  XIII 
The  Principal  American  Crises 

PAGE 

Frequency  of  American  business  crises. — Changes  in  the  nature  of 
crises. — The  earlier  crises. — The  crisis  of  1837. — The  crisis  of  1857. — 
The  crisis  of  1873.— The  crisis  of  1884.— The  crisis  of  1893.— The  crisis 
of  1907.— The  crisis  of  1920 245 

APPENDIX 
Sources  of  barometric  information        258 


CONTENTS  xiii 

TABLES 

NO.  PAGE 

1.  American  Experience  Table  of  Mortality 8 

2.  Verification  of  American  Experience  Table  of  Mortality,  1900-1916      .  9 

3.  Verification    of   A.M.    36-hour   Weather    and    Temperature    Forecasts, 

1915-1919 11 

4.  Rate  of  Growth  of  Population  of  the  United  States,  1800-1920     ...      13 

5.  Population  of  the  United  States,  Actual  and  Prospective,  1790-2080       .  14 

6.  Verification  of  Budget  Estimates  of  the  United  Kingdom,   1911-1921   .  15 

7.  Verification  of  the  Preliminary  Estimates  of  the  Secretary  of  the  Trea- 

sury of  the  United  States,   1917-1920 16 

8.  Verification  of  the  Winter  Wheat  Forecasts  of  the  Department  of  Agri- 

culture,  1910-1920 18 

9.  Condition  of  U.  S.  Corn  Crop  by  Months,  1900-1920 64 

10.  Extent  and  Causes  of  Yearly  Corn  Crop  Loss  in  U.  S 66 

11.  Percentage  of  Corn  Crop  Harvested  Monthly  in  U.  S 66 

12.  Acreage,  Production,  and  Value  of  U.  S.  Corn  Crop,  1900-1920       .      .  67 

13.  Production  and  Exportation  of  Wheat,  1909-1913 69 

14.  Condition  of  U.  S.  Winter  and  Spring  Wheat  Crop,  1900-1920  ...  70 

15.  Extent  and  Causes  of  Yearly  Wheat  Crop  Loss  in  U.  S 71 

16.  Percentage  of  Wheat  Crop  Harvested  Monthly  in  U.  S 71 

17.  Relative  Production  of  Spring  and  Winter  Wheat  in  U.  S.,  1910-1920  71 

18.  Acreage,  Production,  and  Value  of  U.  S.  Wheat  Crop,  1900-1920     .      .  72 

19.  Production  and  Exportation  of  Cotton,   1909-1913 73 

20.  Condition  of  U.  S.  Cotton  Crop  by  Months,  1899-1920 75 

21.  Extent  and  Causes  of  Yearly  Cotton  Crop  Loss  in  U.  S 75 

22.  Percentage  of  Cotton  Crop  Harvested  Monthly  in  U.  S 76 

23.  Acreage,  Production,  and  Value  of  U.  S.  Cotton  Crop,  1899-1920     .      .  78 

24.  Value  of  U.  S.  Farm  Crops  According  to  States,  1920 79 

25.  Pig  Iron  Production  in  U.  S.,  1901-1920 84 

26.  Monthly  Pig  Iron  Production  in  U.  S.,  1911-1920 85 

27.  Unfilled  Orders  of  U.  S.  Steel  Corporation,  1911-1920 86 

28.  Bituminous  Coal  Production  in  U.  S.,  1913-1920 88 

29.  Imports  of  Principal  Raw  Materials  Used  in  Manufacture  in   U.  S., 

1901-1920 89 

30.  New   Building   Permits,    1911-1920 95 

31.  Indices  of  Current  Production  and  Trade,  1919-1920 98 

32.  Wholesale  Prices  in  the  U.  S.,  1890-1920 102 

33.  Bradstreet's  Wholesale  Price  Index  Monthly,  1911-1920 103 

34.  U.    S.    Department   of   Labor   Wholesale    Price   Index  by    Commodity 

Groups,    1890-1920 104 

35.  The  Decline  in  Wholesale  Prices,   1920-1921 114 

36.  Relative   Changes   in   Prices   of   Farm   Products  and   Other   Commod- 

ities,   1890-1920 116 

37.  Idle  Car  Figures  Monthly,  1913-1920 117 

38.  Weekly  Car  Loadings  of  U.  S.  Railroads,  1919-1920 120 

39.  Foreign  Trade  of  the  U.  S.,   1867-1920 123 

40.  Monthly  Merchandise  Exports  of  the  U.  S.,  1911-1920 125 

41.  Foreign  Trade  of  the  U.  S.  by  Grand  Divisions,  1913  and  1920  ...  126 

42.  Leading  Exports  of  the  U.  S.,  Values  and  Ranking,  1918-1920     ...  127 

43.  Exports  of  Manufactured  Products  of  the  U.  S.,  1910-1920     ....  128 

44.  Monthly  Merchandise  Imports  of  the  U.  S.,  1911-1920 129 

45.  Leading  Imports  of  the  U.  S.,  Values  and  Ranking,  1918-1920  ...  130 

46.  Monthly  Balance  of  Trade  of  the   U.  S.,   1911-1920 132 

47.  Condition  of  Retail  Trade  in  the  U.  S.,  1920-1921 136 


xiv  CONTENTS 

NO.  PACE 

48.  Comparison    of  Employment    Conditions    in    February    1921,    January 

1921,  and   February  1920 139 

49.  Index  Number  of  Wages  Per  Hour  in  U.  S.,  1840-1920 141 

50.  Comparison  of  Wholesale  Prices  and  Wages,  1890-1920 143 

51.  Immigration  into  the   U.   S.,   1851-1920 149 

52.  Net  Earnings  of  Principal  U.  S.  Railroads,  1910-1920 153 

53.  Net  Earnings  of  U.  S.  Steel  Corp.  Quarterly,  1906-1920 154 

54.  Dividend  Record  of  Pennsylvania  R.  R.  Co.,  1856-1921 155 

55.  Dividend  Record  of  U.  S.  Steel  Corp.,  1902-1920 156 

56.  Commercial  Failures  in  the  U.  S.,  1891-1920 159 

57.  New  Security  Issues  in  the  U.  S.,  1907-1920 162 

58.  Transactions  on  New  York  Stock  Exchange  Monthly,  1911-1920       .      .  166 

59.  Number  and  Average  Price  of  Shares  Sold,  New  York  Stock  Exchange, 

1897-1920 167 

60.  Average   Price   of   25   Industrial   Stocks,    New   York    Stock   Exchange, 

1911-1920 170 

61.  Spot  and  Future  Cotton  Quotations,  June  10,  1921 172 

62.  Wholesale  Price  of  Wheat  Monthly,   1911-1920 176 

63.  Wholesale  Price  of  Corn  Monthly,  1911-1920 177 

64.  Wholesale  Price  of  Cotton  Monthly,  1911-1920 178 

65.  Wholesale  Price  of  Wool    Monthly,    1911-1920 180 

66.  Wholesale  Price  of  Coffee  Monthly,  1911-1920 181 

67.  Wholesale  Price  of  Sugar  Monthly,  1911-1920        182 

68.  Wholesale  Price  of  Rubber  Monthly,   1911-1920 184 

69.  Wholesale  Price  of  Pig  Iron  Monthly,  1911-1920         185 

70.  Wholesale  Price  of  Copper  Monthly,  1911-1920 186 

71.  Bank  Clearings  Outside  New  York  City,   1911-1920 192 

72.  Operations  of  the  Federal  Reserve  Clearing  System,  1919-1921   ...  193 

73.  Banking  Progress,   1914-1920 195 

74.  Statement  of  the  Condition  of  the  Combined   Federal  Reserve  Banks, 

June  15,  1921 197 

75.  Gold  Holdings  of  Federal  Reserve  Banks,  1914-1920 200 

76.  Money  in  Circulation  in  U.  S.,  June  1,  1921 201 

77.  Federal  Reserve  Notes  in  Circulation,  1919-1921 202 

78.  Federal  Reserve  Ratios,  1914-1920 204 

79.  Statement   of   Reporting  Member   Banks   of   Federal   Reserve    System, 

June   8,    1921 206 

80.  Condition  of  National  Banks  at  Comptroller's  Calls,   1912-1920     .      .  208 

81.  Discount   Rates,   Federal   Reserve   Bank   of   New   York    and   Bank   of 

England,    1911-1920      211 

82.  Market  Interest  Rates  on   Commercial   Paper,  New  York   City,   1911- 

1920 212 

83.  Call  Loan  Rates,  New  York  City,   1911-1920 214 

84.  Balance  of  Gold  Movements  to  and  from  United  States,  1890-1920  .      .  216 

85.  Gold  Holdings  of  Leading  Nations,  1919 217 

86.  Rand  Gold  Production,  1911-1920 220 

87.  Public  Debt  of  U.  S.,  June  1,  1921 222 

88.  Daily  Statement  of  U.  S.  Treasury  Department,  June  15,  1921   ...  223 

89.  Condition  of  U.  S.  Banks,  1811,  1816,  1817 247 

90.  Bank  Expansion  in   U.   S.,   1829-1845 248 

91.  Banking  Conditions  in  U.  S.,  1846-1860 249 

92.  New  Railroad  Mileage  Construction  in  U.  S.,  1840-1900 250 

93.  Ratio  of  Gold  lo  Silver  According  to  Market  Values,  1840-1895              *  253 


CONTENTS  xv 
CHARTS 

NO.  PAGE 

I.  The  Business  Cycle 21 

II.  Annual  Production  and  December  1  Price  of  Corn:  1890-1920      .  65 

III.  Annual  Production  and  December  1  Price  of  Wheat:  1890-1920  .  68 

IV.  Annual  Production  and  December  1  Price  of  Cotton:  1890-1920  .  74 
V.  Effect   of  Prevailing   Price    Upon   Acreage    Planted    to    Winter 

Wheat:    1893-1915 77 

VI.  Comparison  of  Agricultural  Production  With  Average  Whole- 
sale Prices:  1890-1920 81 

VII.  U.   S.   Pig-iron   Production,   Corrected   for    Secular   Trend   and 

Seasonal  Variation:  1903-1917 91 

VIII.  Bradstreet's  Index  of  Wholesale  Prices:  1892-1920       ....  101 
IX.  Relative    Wholesale    Prices,     Farm    Products    and    Wholesale 

Prices:  1890-1920        105 

X.  Relative  Wholesale  Prices,  Foodstuffs,   1890-1920 106 

XI.  Relative  Wholesale  Prices,  Clothing,    1890-1920 107 

XII.  Relative  Wholesale  Prices,  Fuel,  1890-1920 108 

XIII.  Relative  Wholesale  Prices,  Metals,  1890-1920          109 

XIV.  Relative  Wholesale  Prices,  Building  Materials,   1890-1920    .      .  110 
XV.  Relative  Wholesale  Prices,  Chemicals,   1890-1920 Ill 

XVI.  Relative  Wholesale  Prices,  House   Furnishings,   1890-1920     .      .112 

XVIL  Trend  in  Volume  of  Idle  Freight  Cars:  1913-1920       ....  119 

XVIII.  Foreign  Trade  of  the  United  States:  1890-1920 124 

XIX.  Comparison  of  Wholesale  Prices  and  Wages:  1890-1920  ...  144 

XX.  Immigration  into  the  United  States:  1890-1920 147 

XXI.  Commercial  Failures  in  the  United  States:  1890-1920  ....  160 
XXII.  Trend  of  Industrial  Stocks  on  New  York  Stock  Exchange:  1896- 

1920         169 

XXIII.  Trend  of  Wheat  Prices:  1910-1920 179 

XXIV.  Trend  of  Corn  Prices:  1910-1920 179 

XXV.  Trend  of  Cotton  Prices:   1910-1920 179 

XXVI.  Trend  of  Wool  Prices:.  1910-1920 183 

XXVII.  Trend  of  Coffee  Prices:  1910-1920 183 

XXVIII.  Trend  of  Sugar  Prices:  1910-1920 183 

XXIX.  Trend  of  Rubber  Prices:  1910-1920 187 

XXX.  Trend  of  Pig-iron  Prices:  1910-1920        187 

XXXI.  Trend  of  Copper  Prices:   1910-1920 187 

XXXII.  Bank  Clearings  in  the  United  States:  1890-1920 189 

XXXIII.  Federal  Reserve  Notes  in  Circulation:  1919-1921 199 

XXXIV.  Commercial  Paper  Interest  Rates:  1831-1920 213 

XXXV.  Balance  of  Gold  Movements  of  the  U.  S.:  1890-1920   ....  218 

XXXVI.  Railroad  Construction  in  the  U.  S.:  1868-1899 251 

XXXVII.  Relative  Gold  and  Silver  Prices:  1867-1899 254 


Part  I 

THE  RELATION  OF  FORECASTING 
TO  BUSINESS 


Chapter  I 

PRACTICAL  FORECASTING 

Foresight  in  business. — Business  prosperity  depends  pri- 
marily upon  the  ability  of  individuals  to  anticipate  the  future. 
An  accurate  appreciation  of  the  developments  which  are  likely 
to  transpire  in  the  ensuing  months  places  a  business  man  in 
a  strategic  position  in  the  determination  of  the  current  policy 
of  his  establishment.  If  the  probable  course  of  prices  is  up- 
ward, he  will  purchase  freely  at  the  moment,  to  cover  not  alone 
his  current  requirements,  but  future  needs  as  well,  and  will 
profit  accordingly  if  his  judgment  has  been  correct.  If  the 
converse  is  true,  and  prices  seem  destined  to  lower,  he  will 
largely  restrict  his  purchases  in  the  existing  market  to  take 
advantage  of  the  probable  decline  later.1 

Men  who  have  been  able  to  foresee  developments  most 
clearly  have  long  been  the  leaders  in  world  affairs.  Napo- 
leon's ability  to  anticipate  the  plans  of  his  opponents  was  the 
chief  factor  to  which  his  military  achievements  may  be  attri- 
buted. James  J.  Hill,  the  "Empire  Builder,"  lived  to  see  his 
prophecies  fulfilled  in  the  development  of  our  Western  States, 
as  did  Cecil  Rhodes  in  South  Africa.  The  success  which 
Charles  M.  Schwab  has  had  in  the  progress  of  the  Bethlehem 
Steel  Corporation  is  founded  upon  the  same  basis  of  intelli- 
gent foresight  that  gives  John  Brown  more  than  a  competence 
in  conducting  a  general  store  at  Latham's  Corners. 

While  he  is  at  work,  the  business  man  lives  in  the  future. 
It  must  always  be  so.  To-day's  commerce  is  in  anticipation 
of  to-morrow's  requirements.     The  wheat  which  is  planted 

1  One  of  the  leading  cotton-goods  houses  of  New  York  City  was  carrying  a 
large  stock  of  a  certain  make  in  January  of  1920.  The  current  price  was  about 
22  cents  a  yard.  The  house  said  "24  or  18"  meaning  that  it  would  hold  out 
for  24  cents,  appreciating  that  such  policy  involved  a  risk  of  loss  should  the 
price  decline  meanwhile,  but  placing  the  limitation  to  which  the  price  might 
drop  at  18  cents.  The  price  dropped  so  rapidly  immediately  thereafter  that 
the  firm  experienced  considerable  difficulty  in  finding  purchasers  at  8  cents  a 
yard.    The  loss  to  the  house  amounted  to  many  thousands  of  dollars. 

3 


4  BUSINESS  FORECASTING 

in  the  fall  anticipates  hunger  that  is  twelve  months  distant. 
Locomotives  and  freight  cars  are  manufactured  for  traffic 
which  may  prove  quite  different  from  the  estimated  volume. 
That  the  Tuesday  Afternoon  Sewing  Circle  might  close  with 
tea,  a  thousand  business  men,  half  the  world  around,  have 
been  obliged  to  live  in  the  future.  The  tea  must  be  planted, 
cared  for,  and  picked;  then  dried  and  packed  in  storehouses; 
transported  over  land  and  sea;  ere  it  can  reach  the  cup  of  the 
gentlewoman,  ultimately,  perhaps  to  form  the  basis  of  a  man- 
ner of  prophesy  quite  without  the  domain  of  this  volume. 

Men,  therefore,  succeed  in  business  in  direct  proportion  to 
their  ability  to  forecast  the  future.  The  law  of  gravitation  is 
not  more  certain.  And  this  is  submitted  without  the  qualifi- 
cation of  "other  things  being  equal"  as  the  inequality  of  en- 
vironing circumstances  will  quickly  disappear  with  the  advent 
of  very  few  false  judgments. 

Possibility  of  accurate  forecasting. — General  agreement  ex- 
ists that  the  man  in  business  who  is  able  to  foresee  develop- 
ments has  a  decided  advantage  over  less  fortunate  rivals. 
But  a  wide  variance  of  opinion  exists  as  to  the  limit  to  which 
the  future  may  be  predetermined.  The  world  at  large  is  dis- 
posed to  consider  the  future  as  an  impenetrable  mystery,  quite 
beyond  the  power  of  ordinary  humans  to  foretell.  Yet  even 
the  most  superficial  examination  of  the  achievements  of  men 
in  science  and  in  commerce  is  sufficient  to  indicate  that  com- 
ing events  may  be  predicted  with  accuracy. 

The  discovery  of  the  planet  Neptune  was  predicted  by  Le- 
verrier  in  France  and  Adams  in  England  as  a  result  of  pure 
mathematical  calculations — one  of  the  greatest  accomplish- 
ments of  the  human  intellect;  in  fact,  so  certain  was  the  pre- 
diction that  astronomers  date  the  discovery  from  the  time  of 
the  forecast.  Halley  predicted  that  the  comet  which  bears 
his  name  would  return  in  1758,  and  although  he  knew  he 
could  not  live  to  observe  the  verification  of  his  foresight,  he 
stated  that  he  was  content  that  impartial  posterity  would 
deal  with  him  fairly.  The  amazing  accuracy  with  which 
eclipses  are  foretold,  and  tide  effects  are  predetermined,  bear 
witness  to  the  possibility  of  successful  forecasting. 

But  the  reader  may  register  objection.  Astronomy  is  such 
an  exact  science,  and  economics  so  inexact,  that  the  analogy 
may  not  be  well  taken.  But  there  are  other  fields  in  which  fore- 
casting must  constantly  be  employed,  such  as  life  insurance, 


PRACTICAL  FORECASTING  5 

weather  reporting,  crop  reporting,  census  work,  and  the  prep- 
aration of  Governmental  budgets.  The  purpose  of  the  re- 
mainder of  this  chapter  will  be  to  examine  the  methods  em- 
ployed and  to  verify  the  accomplishments,  in  order  to  ascertain 
the  degree  of  accuracy  with  which  the  future  has  been  fore- 
told in  each  of  these  fields. 

Mathematics  of  probabilities. — A  consideration  of  the 
mathematical  theory  of  probabilities  is  of  interest  at  this  point. 
The  theory  of  probabilities  has  its  foundation  in  the  law  of 
causality  which  may  be  stated  broadly  as  follows: 

Everything  that  happens,  and  everything  that 
exists,  necessarily  happens  or  exists  as  the  con- 
sequence of  a  previous  state  of  things? 


"This  law  cannot  be  proven.  It  must  be  taken,  a  priori,  as 
an  axiom;  but  once  accepted  as  a  truth  it  does  away  with  the 
belief  of  a  capricious  ruling  power,  and  even  if  the  strongest 
disbeliever  of  the  law  may  deny  its  truth  in  theory  he  invari- 
ably applies  it  in  practice  during  his  daily  occupation  in  life."3 

The  law  of  causality  is  the  basis  of  all  intelligent  forecasting. 
The  practical  business  man,  unlike  Macbeth,  has  as  little  faith 
in  seers  who  gaze  into  crystal  globes  as  he  has  in  the  ouija 
board.  What  has  happened  to-day  is  the  result  of  the  events 
of  yesterday  and  the  days  before;  what  will  happen  to-morrow 
will  be  the  effect  of  causes  presently  operating.  The  problem 
of  successful  forecasting  resolves  itself  therefore  into  the  ap- 
parently less  difficult  task  of  properly  appraising  existing 
forces.4 

The  mathematics  of  probabilities  offers  but  limited  assis- 
tance to  the  predetermination  of  economic  developments,  how- 
ever. Its  domain  includes  only  those  cases  where  all  possible 
happenings  are  known  in  advance,  and  where  no  particular 
happening  will  occur  in  preference  to  any  other.  It  is  a  study 
of  pure  chance,  and  originated  with  the  problems  of  gambling. 

3  "The  Mathematical  Theory  of  Probabilities,"  Arne  Fisher,  p.  2. 

3  Idem. 

*  "Consider  how  all  events  are  interconnected.  When  we  see  the  lightning, 
we  listen  for  the  thunder;  when  we  hear  the  wind,  we  look  for  the  waves  on 
the  sea;  in  the  chill  autumn,  the  leaves  fall.  Everywhere  order  reigns,  so  that 
when  some  circumstances  have  been  noted  we  can  foresee  that  others  will  also 
be  present." — "An  Introduction  to  Mathematics,"  A.  N.  Whitehead,  p.  11. 


6  BUSINESS  FORECASTING 

In  economics,  its  most  important  function  is  its  service  in  the 
field  of  insurance.  In  other  branches  of  industry,  the  applica- 
tion of  the  theory  is  attendant  with  considerable  risk.5 

In  business,  conditions  are  not  opportune  for  a  general  ap- 
plication of  the  theory  of  mathematical  probability.  Human  in- 
tellect has  not  thus  far  developed  the  capacity  simultaneously 
to  comprehend  and  properly  to  coordinate  all  the  possible 
happenings  in  the  economic  activity  of  the  world,  even  were 
those  events  "equally  likely"  to  occur,  a  hypothesis  contrary 
to   established  belief. 

Astronomical  predictions. — So  great  is  public  confidence 
that  the  predictions  of  the  astronomers  (as  sharply  distinguish- 
ed from  the  astrologers)6  will  be  verified  that  they  are  accept- 
ed with  the  same  assurance  that  one  feels  toward  sunrise  on 
the  morrow.  The  startling  accuracy  with  which  the  astron- 
omers predict  eclipses,  comets,  and  tides,  is  based  upon  the 
mathematical  application  of  Newton's  law  of  gravitation, 
which  is  a  specific  illustration  of  the  law  of  causality.  The 
astronomers  measure  the  causes,  and  their  accuracy  in  predict- 
ing the  effect  reflects  the  completeness  with  which  they  have 
taken  into  consideration  existing  forces.  But  even  the  astron- 
omers err  at  times.  Halley's  Comet  reached  perihelion  on 
April  20,  1910,  differing  by  2.7  days  from  the  predictions. 
The  percentage  of  error  was  less  than  1-100  of  1  per  cent., 
which  was  ascribed  to  the  existence  of  forces  which  are  not 
pure  gravitation,  and  which,  therefore,  could  not  be  measured. 

The  prediction  of  tidal  movements  is  fully  as  remarkable 
as  that  of  eclipses  and  comets.  The  movement  is  fairly  uni- 
form in  some  parts  of  the  world,  but  in  other  regions  the  ir- 
regularity is  marked  even  from  day  to  day.  The  method  em- 
ployed in  predetermining  the  Indian  tides  is  of  especial  inter- 
est: 

Along  the  coasts  of  the  British  ^les  the  tides  are  somewhat  ex- 
ceptional, in  that  the  two  tides  each  day  are  approximately  of 
the  same  height.  In  consequence  the  tides  are  not  very  difficult  to 
predict  with  fair  accuracy  by  the  use  of  rather  rough  and  ready 

6  "The  theory  has  been  applied  freely,  and  in  many  cases,  rashly,  too  little 
attention  having  been  paid  to  the  fact  that  its  applications  really  lie  in  the 
domain  of  those  events  whose  occurrences  may  properly  be  compared  to  the 
drawings  of  balls  from  a  bag." — "The  Americana,"  vol.  22,  p.  624. 

"Astronomy  is  a  study  of  the  celestial  bodies,  independent  of  occurrences  on 
the  earth;  astrology  endeavors  to  associate  occurrences  on  the  earth  with  the 
position  of  the  stars.     Astrology  is  a  delusion,  not  a  science. 


PRACTICAL  FORECASTING 

methods.  In  other  parts  of  the  world — India,  for  example — the 
two  successive  tides  are  very  unequal,  and  they  vary  apparently 
very  irregularly.  Far  more  scientific  procedure  is  then  required, 
to  predict  the  tides  with  the  accuracy  demanded  by  navigators  in 
the  Eastern  seas.  First,  the  tides,  for  a  series  of  years,  must  be 
observed  at  various  ports.  Then  the  observed  tidal  curve  must 
be  analysed  into  its  separate  components  by  the  method  known  as 
harmonic  analysis.  When  that  is  done,  the  tides  for  future  years 
can  be  predicted  by  the  beautiful  machine,  the  property  of  the 
Government  of  India,  which  used  to  stand  in  the  Museum  at  South 
Kensington,  and  is  now  in  the  National  Physical  Laboratory  at 
Bushby  House.  Every  year  a  series  of  pulley  wheels  in  this 
machine  are  set  to  execute  the  oscillations  prescribed  for  them  by 
the  results  of  the  analysis.  A  cord  passes  over  the  entire  series 
and  carries  a  pen  at  the  end.  The  machine  is  set  in  motion,  and 
the  pen,  actuated  by  the  combined  motion  of  all  the  pulleys,  draws 
in  a  few  hours  the  predicted  curves  for  the  year,  one  after  the 
other,  for  the  principal  Indian  ports.' 


That  forecasting  has  developed  into  a  science  in  certain  fields 
whereby  it  is  actually  accomplished  by  machinery,  will  prove 
a  revelation  to  business  men  who  believe  the  future  is  "with  the 
gods  alone." 

Life  insurance  forecasting. — The  ability  of  life  insurance 
companies  to  predetermine  from  year  to  year  the  amounts 
which  they  will  be  called  upon  to  pay  in  death  claims  has  long 
been  a  subject  for  favorable  comment  in  commercial  circles. 
The  solvency  of  the  institutions,  as  well  as  the  determination 
of  the  amount  of  the  premium  charge,  depends  upon  an  accu- 
rate estimate  of  the  obligations  which  arise  from  month  to 
month.  The  fact  that  the  amount  of  these  obligations  depends 
directly  upon  the  apparently  uncertain  life  tenure  of  the  policy- 
holders, would  seem  to  make  the  problem  of  the  insurance 
companies  infinitely  more  difficult  than  that  of  the  ordinary 
commercial  enterprises  whose  obligations  appear  to  have  a 
greater  element  of  definitiveness.  An  inquiry  into  the  method 
employed  by  the  life  insurance  companies  in  anticipating  their 
obligations,  and  the  extent  to  which  they  have  been  successful, 
should  prove  of  interest. 

Practically  all  of  the  United  States  life  insurance  companies 
estimate  their  anticipated  death  claims  from  the  American  Ex- 
perience Table  of  Mortality  which  is  shown  in  somewhat 
abridged  form  in  Table  1.     This  table  was  compiled  about 

*  From  "Astronomy,"  by  Arthur  R.  Hinks,  p.  59, 


BUSINESS  FORECASTING 

TABLE    1.— AMERICAN    EXPERIENCE   TABLE   OF   MORTALITY* 


Yearly  prob- 

Yearly prob 

Number 

Number 

ability  of 

Number 

Number 

ability  of 

4ge 

Living 

Dying 

dying 
Per  cent 

Age 

Living 

Dying 

dying 
Per  cent 

10 

100,000 

749 

00.75 

53 

66,797 

1,091 

1.63 

11 

99,251 

746 

00.75 

54 

65,706 

1,143 

1.73 

12 

98,505 

743 

00.75 

55 

64,563 

1,199 

1.85 

13 

97,762 

740 

00.76 

56 

63,364 

1,260 

1.98 

14 

97,022 

737 

00.76 

57 

62,104 

1,325 

2.13 

15 

96,285 

735 

00.76 

58 

60,779 

1,394 

2.29 

16 

95,550 

732 

00.77 

59 

59,385 

1,468 

2.47 

17 

94,818 

729 

00.77 

60 

57,917 

1,546 

2.66 

18 

94,089 

121 

00.77 

61 

56,371 

1,628 

2.88 

19 

93,362 

725 

00.78 

62 

54,743 

1,713 

3.12 

20 

92,637 

723 

00.78 

63 

53,030 

1,800 

3.39 

21 

91,914 

722 

00.79 

64 

51,230 

1,889 

3.68 

22 

91,192 

721 

00.79 

65 

49,341 

1,980 

4.01 

23 

90,471 

720 

00.80 

66 

47,361 

2,070 

4.37 

24 

89,751 

719 

00.80 

67 

45,291 

2,158 

4.76 

25 

89,032 

718 

00.81 

68 

43,133 

2,243 

5.20 

26 

88,314 

718 

00.82 

69 

40,890 

2,321 

5.67 

27 

87,596 

718 

00.83 

70 

38,569 

2,391 

6.19 

28 

86,878 

718 

00.83 

71 

36,178 

2,448 

6.76 

29 

86,160 

719 

00.84 

72 

33,730 

2,487 

7.37 

30 

85,441 

720 

00.85 

73 

31,243 

2,505 

8.01 

31 

84,721 

721 

00.86 

74 

28,738 

2,501 

8.70 

32 

84,000 

723 

00.87 

75 

26,237 

2,476 

9.43 

33 

83,277 

726 

00.88 

76 

23,761 

2,431 

10.23 

34 

82,551 

729 

00.88 

77 

21,330 

2,369 

11.10 

35 

81,822 

732 

00.89 

78 

18,961 

2,291 

12.08 

36 

81,090 

737 

00.90 

79 

16,670 

2,196 

13.17 

37 

80,353 

742 

00.92 

80 

14,474 

2,091 

14.44 

38 

79,611 

749 

00.94 

81 

12,383 

1,964 

15.86 

39 

78,862 

756 

00.95 

82 

10,419 

1,816 

17.42 

40 

78,106 

765 

00.97 

83 

8,603 

1,648 

19.15 

41 

77,341 

774 

01.00 

84 

6,955 

1,470 

21.13 

42 

76,567 

785 

01.02 

85 

5,485 

1,292 

23.55 

43 

75,782 

797 

01.05 

86 

4,193 

1,114 

26.76 

44 

74,985 

812 

01.08 

87 

3,079 

933 

30.30 

45 

74,173 

828 

01.11 

88 

2,146 

744 

34.66 

46 

73,345 

848 

01.15 

89 

1,402 

555 

39.58 

47 

72,497 

870 

01.20 

90 

847 

385 

45.45 

48 

71,627 

896 

01.25 

91 

462 

246 

53.24 

49 

70,731 

927 

01.31 

92 

216 

137 

63.42 

50  69,804         962  01.37  93  79  58  73.41 

51  68,842      1,001  01.45  94  21  18  85.71 

52  67,841      1,044            01.53                 95                  3                   3  100.00 
*  Compiled  from  "Practical  Lessons  in  Actuarial  Science,"  vol.  II,  p.  7. 


PRACTICAL  FORECASTING  9 

1870  and  is  supposed  to  represent  the  actual  experience  of  one 
of  the  larger  American  companies  during  preceding  years.8 

An  investigation  conducted  by  The  Actuarial  Society  of 
America  in  1918  reviewed  the  actual  experience  of  the  prin- 
cipal American  life  insurance  companies  during  the  years  1900 
to  1915  inclusive,  based  on  policies  issued  from  1843  to  1914 
inclusive.     The  result  is  shown  in  Table  2. 


TABLE  2.— VERIFICATION  OF  THE  AMERICAN  EXPERIENCE  TABLE 

OF  MORTALITY  BY  THE  PRINCIPAL   UNITED   STATES 

LIFE  INSURANCE  COMPANIES,   1900-1915* 

Ratio  of  actual  deaths 
Attained  to  expected  deaths 

age  Per  cent 

20 51 

25  53 

30  51 

35  55 

40 59 

45  : 69 

50 86 

55   95 

60 99 

65  103 

70 100 

75  96 

80 92 

Average   78 

•After   eliminating  policies  in   force   five   years   or   less. — From   "American- 
Canadian  Mortality  Investigation,  1918." 


The  result  is  somewhat  surprising  inasmuch  as  the  insurance 
companies  apparently  do  not  gain  the  degree  of  accuracy  with 
which  they  are  usually  credited.  The  experience  of  the  com- 
panies during  the  nineteenth  century  should  have  enabled  them 
to  prepare  estimates  for  the  first  fifteen  years  of  the  twentieth 
century  which  should  be  closer  than  78  per  cent  accurate.  In 
fairness  to  the  companies,  it  must  be  stated  that  they  appreciate 
that  the  American  Experience  Table  is  an  overestimate,  and 
that  they  actually  anticipate  only  between  80  to  85  per  cent  of 
the  expected  deaths  will  occur.     For  obvious  reasons,  they  are 

8  The  table  was  compiled  in  1868  by  Sheppard  Homans  of  the  Mutual  Life 
of  New  York.  CF.  Transactions  of  the  Actuarial  Society  of  America,  Vol.  I,  pp. 
32-34. 


10  BUSINESS  FORECASTING 

willing  to  continue  to  use  the  American  Experience  Table9  al- 
though an  "ultimate  table"  prepared  by  the  actuaries  gains  an 
accuracy  of  between  98.7  and  100.1  per  cent.10 

The  methods  employed  by  the  life  insurance  companies  are 
purely  empirical.  Apparently  no  attempt  is  made  to  establish 
trends  from  year  to  year  or  from  generation  to  generation  in 
the  average  duration  of  life.  The  conditions  which  accom- 
plished a  certain  result  in  the  decade  from  1880  to  1890  are 
accepted  as  holding  true  in  the  period  from  1920  to  1930. 
That  this  will  prove  correct  is  by  no  means  certain;  changing 
living  standards,  better  housing  conditions,  improved  hygiene, 
and  medical  advancement  ought  to  bring  some  measurable  in- 
crease in  the  average  length  of  human  life. 

Weather  forecasts. — "The  wind  blowcth  where  it  listeth," 
runs  the  old  adage.  Yet  few  Americans  appreciate  that  the 
winds  in  the  United  States  blow  where  they  "listeth"  only  3 
per  cent  of  the  time,  while  the  other  97  per  cent  of  the  time 
they  blow  in  the  direction  previously  foretold  by  the  Weather 
Bureau.  Table  3  shows  in  detail  the  verification  of  the  weather 
forecasts  for  the  years  1915  to  1919  inclusive.  The  com- 
bined average  of  weather  and  temperature  predictions  for  all 
the  districts  is  88.4  per  cent  accurate.  This  covers  "affirma- 
tive" predictions11  only  and  is  actually  equivalent  to  97  per 
cent    accuracy  on  all  predictions  made  during  the  period. 

As  in  life  insurance,  weather  forecasting  is  still  in  the  em- 
pirical stage.  The  observations  of  the  past  are  used  solely  in 
predetermining  the  future.  The  Weather  Bureau  is  only  begin- 
ning to  ascertain  if  there  is  a  law  of  changing  weather  to  deter- 
mine if  weather  passes  through  cycles  of  definite  periods  and 
amplitudes.     Present  predictions  are  based  upon  current  infor- 

9  Premium  rates  are  based  upon  the  American  Experience  Table.  The  over- 
charge is  returned  to  the  policyholders  as  "dividends" — an  obvious  misnomer. 

10  "As  additional  proof,  it  may  be  mentioned  that  the  ratio  of  actual  to  ex- 
pected deaths  from  the  eleventh  to  the  fifteenth  insurance  years  inclusive  for 
ages  of  entry  15  to  34  inclusive  was  98.7  per  cent,  while  from  the  sixth  to  the 
tenth  insurance  years  it  was  100.1  per  cent — the  expected  deaths  being  calculated 
by  the  ultimate  table." — "American-Canadian  Mortality  Investigation,   1918." 

11  An  "affirmative"  prediction  is  a  prediction  of  a  change  in  the  weather.  Since 
during  the  year  the  weather  does  not  change  on  successive  days  70  per  cent  of  the 
time,  an  individual  making  a  daily  prediction  that  the  weather  for  the  ensuing 
day  would  be  unchanged  from  the  current  day  would  gain  an  average  of  about 
70.0  per  cent  for  the  year.  The  average  of  88.4  per  cent  gained  by  the  Bureau 
really  represents  88.4  per  cent  of  the  normal  margin  of  30  per  cent  which  com- 
prises the  domain  of  "affirmative"  predictions,  A  "negative"  prediction  is  a 
forecast  of  unchanged  weather. 


PRACTICAL  FORECASTING 


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12  BUSINESS  FORECASTING 

mation  with  no  attempt  to  correlate  the  forecasts  with  the  in- 
fluence of  any  existing  trend.12  But  at  least  one  independent 
investigation13  indicates  a  distinct  probability  that  cycles  of 
rainfall  exist.14  The  empirical  nature  of  the  Weather  Bureau 
forecasts  is  further  illustrated  by  the  inability  of  the  Bureau  to 
predict  with  accuracy  more  than  two  or  three  days  in  advance. 

Census  forecasting. — Although  the  Federal  Census  of  the 
United  States  is  taken  on  a  decennial  basis,  the  Department  of 
Commerce  estimates  each  year  the  population  not  only  for  the 
entire  country  but  for  the  various  subdivisions  as  well.  The 
method  employed  is  to  take  the  average  annual  increase  as  in- 
dicated by  the  ten  year  period  between  the  two  preceding  enu- 
merations on  a  percentage  basis.  For  instance,  the  Federal 
Census  of  1900  showed  a  gain  of  20.7  per  cent  over  the  1890 
enumeration;  it  was  therefore  assumed  that  the  1910  census 
would  show  an  increase  of  the  same  percentage  over  that  of 
1900.  This  assumption  proved  surprisingly  accurate  as  the 
actual  increase  was  exactly  21.0  per  cent.  If  the  same  reason- 
ing were  applied  in  predetermining  the  1920  census,  the  margin 
of  error  would  have  been  considerable  as  the  increase  in  1920 
was  but  14.9  per  cent.  The  discrepancy,  however,  is  entirely 
attributable  to  the  World  War. 

This  method  of  estimating  population  increases  is  open  to 
many  objections.  As  is  indicated  by  Table  4,  the  procedure 
would  have  yielded  satisfactory  results  in  the  decades  preced- 
ing the  Civil  War.  Since  1860,  however,  there  has  been  con- 
siderable irregularity  in  the  increases  on  a  percentage  basis. 
The  average  decennial  increase  for  the  hundred  years  termin- 
ating in  1890  was  32.05  per  cent;  for  the  hundred  years  end- 
ing in  1900,  30.69  per  cent;  ending  in  1910,  29.15  per  cent; 

"The  method  employed  in  forecasting  weather  and  temperature  is  a  further 
illustration  of  the  law  of  causality.  Air  rushing  from  cool  regions  to  warmer 
adjacent  regions  causes  the  wind.  As  the  cool  air  meets  the  warm  atmosphere, 
the  latter  loses  its  capacity  to  hold  vapor,  and  the  condensation,  i.e.,  rainfall, 
results. 

13  "Economic  Cycles:  Their  Law  and  Cause,"  by  Henry  Ludwell  Moore, 
chap.  II. 

"Those  who  have  been  inclined  to  have  but  little  faith  in  the  value  of  the 
weather  forecasts  have  doubtless  been  surprised  to  learn  of  the  accuracy  indi- 
cated in  Table  3.  "Forecasts  cannot  be  made  with  mathematical  accuracy,  for 
they  are  practically  all  empirical  deductions  but  they  do  have  such  a  high 
degree  of  verification  that  no  one  whose  life  or  property  is  affected  by  the  com- 
ing of  severe  storms  would  to-day  consider  for  a  moment  doing  without  the 
benefit  to  be  derived  from  them." — "The  Americana,"  vol.  29,  p.   131. 


PRACTICAL  FORECASTING  13 

ending  in  1920,  27.33  per  cent.  This  clearly  reflects  a  down- 
ward trend  in  the  rate  of  increase,  an  important  factor  which 
should  be  taken  into  consideration  in  estimating  future  in- 
creases. 


TABLE  4.— RATE  OF  GROWTH  OF  POPULATION  OF  THE 
UNITED  STATES,  1800-1920 

Percentage  of  increase 
Year  over  previous  census 

1920  14.9 

1910  21.0 

1900  20.7 

1890  25.5 

1880  22.6 

1870  30.1 

1860  35.6 

1850  35.9 

1840  32.7 

1830  33.5 

1820  33.1 

1810  36.4 

180C  35.1 

The  population  of  the  United  States  in  1920  was  105,708,- 
771  according  to  the  revised  figures.  If  the  trend  on  the 
basis  of  the  periods  of  one  hundred  years  each  which  ended  in 
1890,  1900,  1910,  and  1920  respectively,  should  continue,  the 
percentages  of  increase  at  the  next  three  Federal  censuses 
should  be  approximately  as  follows:  1930,  18.1  per  cent; 
1940,  17.3  per  cent;  and  1950,  16.9  per  cent.  If  this  were 
to  hold  good  the  population  in  1930  would  be  about  125,000,- 
000;  in  1940  about  145,000,000;  and  in  1950  about  170, 
000,000. 

Experience,  however,  has  shown  that  it  is  extremely  unlikely 
that  the  actual  increase  will  be  so  great.  In  countries  such  as 
France  and  Belgium  where  the  natural  resources  have  been 
utilized  to  a  maximum  extent,  the  population  shows  a  high  de- 
gree of  stability  in  contrast  to  the  continual  increases  in  the 
newer  lands  of  America.  If  the  European  experience — and 
for  that  matter,  the  Oriental  as  well — is  to  be  repeated  in  this 
country,  the  rate  of  increase  will  decline  sharply  before  the  end 
of  the  present  century.  A  recent  forecast  of  the  prospective 
population  of  the  United  States  on  the  basis  of  the  European 
and  Oriental  experience  estimated  the  population  in  1930 
would  be  about  120,000,000;  in  1940  about  135,000,000;  in 


14  BUSINESS  FORECASTING 

TABLE  5.— POPULATION  OF  THE  UNITED  STATES,  ACTUAL  AND 

PROSPECTIVE* 

1790  3,929,214 

1800  5,308,483 

1810 7,239,881 

1820   9,638,453 

1830 12,866,020 

1840 17,069,453 

1850 23,191,876 

1860   31,443,321 

1870  38,558,371 

1880  50,155,783 

1890   62,947,714 

1900 75,994,575 

1910   91,972,266 

1920 105,708,771 

1930  120,000.000 

1940 135,UOO,000 

1950   148,000,000 

1960 159,000,000 

2000  183,000,000 

2080 198,000,000 

•Figures   1790-1910,  "Statistical  Abstract  of  the   United   States,"  p.   31,  1920. 

1920,   Commercial  and  Financial  Chronicle,  vol.   112,   No.   2900,  p.    331.     1930- 
1950,  Harper's  Magazine,  vol.  CXLII,  No.  852,  p.  705. 


1950  about  148,000,000;  in  2000  about  183,000,000;  and  a 
maximum  population  of  198,000,000  would  be  reached  2080. 1!S 
National  budget  estimates. — In  the  preparation  of  national 
budgets,  it  is  necessary  to  forecast  both  revenues  and  expendi- 
tures for  the  period  in  question.  The  predetermination  of 
revenues  can  be  accomplished  far  more  scientifically  than  that 
of  expenditures,  owing  to  the  uncertainty  of  legislative  appro- 
priations after  the  compilation  of  the  budget.  None  of  the 
large  nations  following  the  budgetary  system  has  achieved  a 
greater  degree  of  accuracy  in  this  respect  than  has  England. 
For  the  fiscal  year  which  ended  March  31,1921  the  estimated 
revenues  were  £1,418,300,000  and  the  actual  receipts  were 
£1,426,000,000,  or  less  than  6-10ths  of  1  per  cent  from  the 
anticipated  figure.  As  is  shown  in  Table  6  the  average  accu- 
racy for  the  ten  year  period  from  1911  to  1921  was  93.76  per 
cent,  despite  the  fact  that  this  period  included  the  entire  war 

""Forecasting  the  Growth  of  Nations,"  Raymond  Pearl  and  F.  C.  Kelly,  in 
Harper's  Magazine,  vol.  CXLII,  No.  852,  p.  704. 


PRACTICAL  FORECASTING  15 

duration  when  revenues  were  constantly  increasing.  The  av- 
erage accuracy  for  the  pre-war  years  1911-12,  1912-13,  1913- 
14,  and  for  the  first  post-war  year  1920-21,  was  98.8  per  cent. 
Although  the  United  States  was  not  operating  on  the  bud- 
get system  during  the  years  1917  to  1920  inclusive,  the  Secre- 
tary of  the  Treasury  in  his  annual  report  for  each  year  esti- 
mated the  anticipated  revenues  during  the  succeeding  fiscal 
year.  Inasmuch  as  it  is  the  custom  for  Congress  to  have  the 
Treasury  Department  estimate  the  revenue  from  proposed  tax 
laws  before  voting  upon  the  measures,  it  is  interesting  to  note 
the  degree  of  accuracy  gained  by  the  Department  in  its  predic- 
tions. The  verification  of  the  preliminary  estimates  of  the 
Secretary  of  the  Treasury  for  the  fiscal  years  1917-18,  1918- 
19,  and  1919-20  is  shown  in  Table  7.  The  average  accuracy 
for  the  three  fiscal  years  on  customs  revenues  was  87.3  per 
cent;  on  income  taxes,  76.5  per  cent;  on  miscellaneous  taxes, 
86.7  per  cent;  and  on  total  taxes  82.1;  on  miscellaneous  rev- 
enues 87.9  per  cent;  and  on  total  revenues,  83.6  per  cent. 

TABLE  6.— VERIFICATION  OF  THE  ESTIMATES  OF  REVENUES  UNDER 
THE  NATIONAL  BUDGET  OF  THE  UNITED  KINGDOM,  1911-1921* 

(000  omitted) 

Percentage  of 
Year  Estimated  Actual  accuracy 

1920-1921    £1,418,300  £1,426,000  99.4 

1919-1920    1,201,100  1,339,571  88.5 

1918-1919    842,050  889,020  94.6 

1917-1918    638,600  707,234  89.2 

1916-1917    .,        '509,000  573,429  87.4 

1915-1916    .'         305,000  336,766  89.8 

1914-1915    211,296  226,694  92.9 

1913-1914 195,825  198,242  98.5 

1912-1913    187,189  188,802  99.5 

1911-1912    181,621  185,090  97.8 

•Compiled  from  The  Economist,  London. 

Three  methods  are  employed  in  predetermining  revenues 
under  National  budget  systems:16 

1.  The  automatic  (averaging)  system.  Under  this 
method,  the  results  of  the  year  before  the  last  year,  the 
"penultimate"  as  it  is  called,  are  arbitrarily  assumed  to  obtain 
for  the  coming  year. 

2.  The  system  of  (estimating)  increases  (and  decreases). 

3.  The  system  of  direct  valuation   (estimating  de  novo 
each  year). 

"  From   The  Budget,  Rene  Stourm,  p.  172. 


16 


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PRACTICAL  FORECASTING  17 

The  British  method  is  really  a  combination  of  all  three,1' 
whereas  the  method  employed  by  the  Secretary  of  the  Treas- 
ury in  the  United  States  is  a  system  of  direct  valuation. 

Crop  forecasting. — The  monthly  reports  of  the  Department 
of  Agriculture  may  be  regarded  as  incomplete  forecasts.  They 
state  that  the  current  condition  of  a  certain  crop  indicates  a  def- 
inite yield  per  acre,  provided  normal  conditions  obtain  until 
the  final  harvest.  The  department  does  not  attempt  to  pre- 
determine abnormal  occurrences  which  may  develop  in  the  in- 
terim, such  as  unusual  weather,  abandoned  acreage,  insect 
ravage,  and  similar  factors.  For  this  reason,  the  crop  reports18 
are  not  issued  as  definite  forecasts  of  the  ensuing  harvest.  The 
degree  of  accuracy  has  accordingly  varied  with  the  influence  of 
the  factors  not  taken  into  consideration.  As  the  quantitative 
interpretation  of  the  condition  reports  of  the  principal  crops, 
except  cotton,  was  not  begun  until  1911,  the  Department  has 
exercised  natural  hesitancy,  in  view  of  its  limited  experience,  in 
attempting  a  complete  forecast  which  would  take  into  consid- 
eration the  effect  of  the  factors  not  presently  included.  There 
is  little  doubt  but  that  eventually  the  Department  will  offer 
complete  forecasts.  The  removal  of  the  obvious  major  ob- 
stacle, that  of  foretelling  weather  conditions,  depends  upon 
the  Weather  Bureau  which  thus  far,  as  has  been  previously 
stated,  has  been  unable  to  predict  accurately  more  than  a  few 
days  in  advance. 

The  verification  of  the  winter  wheat  forecasts  for  the 
years  1910  and  1920  inclusive  is  shown  in  Table  8.  The  first 
estimate  is  given  in  December  of  the  preceding  year,  after 
the  fall  planting,  and  about  eight  months  before  the  harvest. 

11  "In  England,  for  example,  the  submitting  of  the  budget  to  the  House  of 
Commons  on  the  eve,  and  even  more  frequently  on  the  morrow  of  the  opening 
of  the  fiscal  year,  renders  the  automatic  fiction  quite  useless.  As  the  taxes  have 
yielded  a  certain  sum  last  year — which  ended  only  eight  days  ago — they  cer- 
tainly will  be  able  to  yield  either  an  equal  sum  or  a  smaller  or  a  greater  sum, 
according  to  the  conditions  which  affect  them  at  the  given  moment,  or  which 
may  affect  them  within  a  short  time.  The  probabilities  are  so  real  or  so  close 
that  they  are  equivalent  almost  to  accomplished  facts.  The  Chancellor  of  the 
Exchequer  sees  rather  than  anticipates,  and  no  one  would  think,  therefore,  about 
tying  down  his  estimates  by  mechanical  rules  based  on  antiquated  statistics." — 
The  Budget,  Rene  Stourm,  p.  183. 

u  "The  forecasts  are  such  figures  that,  based  upon  average  conditions  in  the 
past  years,  there  is  an  even  chance  or  probability  that  the  final  yield  will  be 
either  above  or  below  the  figure  forecast." — "Government  Crop  Reports,  Their 
Value,  Scope  and  Preparation,"  U.  S.  Dept.  of  Agriculture,  Bureau  of  Crop 
Estimates,  Circular  17,  Revised. 


18  BUSINESS  FORECASTING 

The  second  estimate  is  given  in  April,  after  the  winter  season, 
and  about  four  months  before  harvest.  The  final  estimate  of 
condition  is  given  in  July,  one  month  before  production  is  esti- 
mated. The  July  estimate  is  usually  very  close  to  the  actual 
result.  For  incomplete  forecasts,  the  December  estimates 
have  had  considerable  accuracy.  Naturally,  the  April  esti- 
mates make  a  better  showing. 

TABLE  8.— VERIFICATION  OF  THE  WINTER  WHEAT  FORECASTS  OF 
THE  DEPARTMENT  OF  AGRICULTURE 

December  April  July 

Year  condition  condition  condition 

1920  85.2  75.6  79.7 

1919  98.5  99.8  89.0 

1918  79.3  78.6  79.5 

1917  85.7  63.4  75.9 

1916  87.7  78.3  75.7 

1915  88.3  88.8  84.4 

1914  97.2  95.6  94.1 

1913  93.2  91.6  81.6 

1912  86.6  80.6  73.3 

1911  82.5  83.3  76.8 

1910  95.8  80.8  81.5 

Summary. — Men  in  business  are  constantly  obliged  to  con- 
sider the  future.19  In  fact,  their  prosperity  is  dependent  chiefly 
upon  their  ability  successfully  to  foresee  economic  develop- 
ments. The  practical  business  man  may  profess  but  little  faith 
in  the  capacity  of  the  human  intellect  to  foretell  the  future,  but 
consciously  or  not  he  is  continually  obliged  to  form  his  own 
estimates  of  what  is  likely  to  happen.20  The  future  is  by  no 
means  indeterminable.  By  careful  analysis  of  concurrent 
events,  and  with  due  regard  to  the  experience  of  former  years, 
economic  forecasting  is  now  being  successfully  accomplished  in 
many  lines.    This  is  evidenced  by  the  verification  of  the  predic- 

1B  "People  will  endeavor  to  forecast  the  future  and  to  make  agreements  accord- 
ing to  their  prophecy.  Speculation  of  this  kind  by  competent  men  is  the  self- 
adjustment  of  society  to  the  probable.  Its  value  is  well  known  as  a  means  of 
avoiding  or  mitigating  catastrophies,  equalizing  prices  and  providing  for  periods 
of  want." — Justice  O.  W.  Holmes,  U.  S.  Supreme  Court,  quoted  by  J.  C.  F.  Merril 
in  "The  Annals,"  vol.  38,  No.  2,  p.  75 

"Lord  Beaconsfield  has  defined  a  practical  man  as  "one  who  practices  the 
errors  of  his  forefathers."  The  modern  business  man  must  be  more  than  solely 
practical  if  he  is  to  achieve  definite  success.  "The  Romans  were  a  great  race, 
but  they  were  cursed  with  the  sterility  which  waits  upon  practicality.  They 
did  not  improve  upon  the  knowledge  of  their  forefathers.  .  .  .  They  were  not 
dreamers  enough  to  arrive  at  new  points  of  view,  which  could  give  a  more 
fundamental  control  over  the  forces  of  nature." — "Introduction  to  Mathematics," 
A.  N.  Whitehead,  p.  41. 


PRACTICAL  FORECASTING  19 

tions  of  the  life  insurance  companies,  of  the  Weather  Bureau, 
of  the  Crop  Reporting  Bureau,  of  the  compilers  of  the  na- 
tional budgets,  and  in  census  work.  That  there  is  room  for 
even  greater  accuracy  in  these  fields  is  indicated  by  the  fact  that 
practically  no  attempt  has  been  made  to  develop  the  forecasting 
beyond  the  empirical  stage.21 

The  law  of  causality  forms  the  basis  of  all  intelligent  fore- 
casting. Since  everything  that  happens  necessarily  occurs  as 
the  consequence  of  a  previous  state  of  things,  the  predetermina- 
tion of  economic  developments  is  predicted  upon  adequate 
knowledge  of  existing  conditions.22  With  the  law  of  causality 
as  a  foundation,  the  present  volume  endeavors  to  analyze  eco- 
nomic happenings  and  conditions  from  an  a  priori  standpoint, 
in  the  belief  that  only  in  this  manner  business  conditions  may 
be  intelligently  and  successfully  predetermined.23 

31  "Risk  and  uncertainty  and  the  possibility  of  shining  success  against  great 
odds  are  to  be  found  at  our  doorsteps.  Our  city  marts  have  become  our  treas- 
ure islands,  and  captains  of  industry  are  as  picturesquely  daring  as  pirates  of 
old.  Business  is  today  the  vast  unknown,  the  great  battleground  in  which 
courage  and  leadership  and  imagination,  the  qualities  which  in  the  past  sought 
their  outlet  in  the  struggle  with  nature,  can  measure  their  strength.  We  have 
but  begun  to  exploit  its  possibilities  and  still  but  guess  at  its  bounds.  It  has 
seas  as  uncharted  as  the  oceans  of  fiction  and  affords  opportunities  as  ready 
to  yield  fruit  to  ingenuity  and  decision  as  the  island  of  a  Crusoe.  And  it  has 
the  advantage  of  offering  a  multiplicity  of  surprises  and  a  whirligig  of  for- 
tunes that  enable  the  romancer  to  indulge  his  fancy  without  running  afoul  of 
the  sense  of  the  multitude.  Science  and  exploration  have  as  yet  set  up  no  rules 
here,  and  chance  takes  a  hand  in  the  game.  Thus  practical  men  whose  zest 
in  adventure  rejects  the  tale  which  fact  has  thrown  out  of  joint  with  fancy  can 
still  read  the  romance  of  business  in  the  belief  that  the  dreams  of  literature 
may  become  the  actualities  of  experience.  Their  sense  of  the  plausible  is 
satisfied  at  the  same  time  that  their  love  of  excitement  finds  gratification.  The 
thrill  of  the  unknown  has  passed  to  the  world  of  finance  and  industry  and 
engineering." — Amy  Loveman  in  New  York  Evening  Post,  July  2,  1921. 

"For,  since  business  cycles  result  from  process  of  cumulative  change,  the 
main  factors  in  shaping  to-morrow  are  the  factors  at  work  yesterday  and  to- 
day"— "Business  Cycles,"  W.  C.  Mitchell,  p.  588. 

"Forecasting  is  not  the  true  field  of  the  economist;  at  least  the  entire  burden 
of  predetermination  should  not  be  his.  The  economist  inherently  reasons  a  pos- 
teriori, from  effect  to  cause;  the  effects  being  known,  his  is  the  task  of  deter- 
mining the  cause.  Empirically,  he  has  become  capable  of  reasoning  a  priori, 
from  cause  to  effect.  If  the  economist  apprehends  all  the  possible  causes  that 
may  arise  in  the  future,  he  can  foretell  the  effect,  but  it  should  not  be  solely  his 
task  to  acquire  the  necessary  comprehension  of  existing  forces  as  well  as  to 
determine  their  effect.  That  a  greater  degree  of  cooperation  from  the  business 
world  in  the  rendition  of  adequate  information  on  current  conditions  is  of  prime 
importance  in  the  development  of  economic  forecasting,  will  become  apparent  in 
the  succeeding  chapters. 


Chapter  II 

THE  BUSINESS  CYCLE 

The  integral  aspect  of  business. — Numerous  forces  are  con- 
stantly operating  in  the  world  of  business.  While  the  pur- 
pose of  the  present  volume  is  to  analyze  these  forces  in  order 
that  intelligent  opinion  may  be  formulated  as  to  their  effect, 
before  any  attempt  is  made  to  consider  them  separately,  the 
manner  in  which  they  function  collectively  must  receive  atten- 
tion. Production  statistics,  for  instance,  are  better  interpreted 
when  the  part  that  productivity  plays  in  changing  business  con- 
ditions is  understood.  As  production  changes,  other  forces 
change  simultaneously.  As  a  later  section  of  the  book  illus- 
trates the  sequence  of  changes  in  each  factor  separately  from 
the  other  factors,  the  present  and  succeeding  chapter  purpose 
to  show  the  manner  in  which  they  operate  collectively. 

The  economic  forces  which  receive  attention  are  arbitrarily 
divided  into  five  groups :  ( 1 )  conditions  relating  to  produc- 
tion; (2)  conditions  relating  to  marketing;  (3)  conditions 
relating  to  labor;  (4)  conditions  relating  to  corporate  prosper- 
ity; and  (5)  conditions  relating  to  finance.  The  first  group 
includes  agriculture,  industry,  and  new  construction.  The  sec- 
ond comprises  prices,  transportation,  foreign  trade  and  retail 
sales.  The  third  includes  employment,  wages,  controversies, 
and  migration.  The  fourth  comprises  earnings,  failures,  new 
security  issues,  and  exchange  transactions.  The  fifth  includes 
bank  clearings,  bank  statements,  interest  rates,  gold  move- 
ments, and  Government  finance. 

To  gain  uniform  presentation,  the  characteristics  of  each 
stage  of  business  are  considered  with  relation  to  each  group 
in  the  order  named.  This  sequence  is  likewise  maintained  in 
Part  II,  which  is  largely  a  statistical  amplification  of  the  pres- 
ent and  succeeding  chapter  and  to  which  these  two  chapters 
serve  as  an  introduction. 

The  fluctuations  of  business. — Business  conditions  are  never 
static.  Constantly  the  trend  of  commercial  activity  is  undergo- 
ing change.     At  one  time,  the  industrial  enterprises  of  the 

20 


THE  BUSINESS  CYCLE 


21 


CHART  I.— THE  BUSINESS  CYCLE 


Period  of  Prosperity 


Period  of 

Reoovsry 

1. Prices  riling. 

2. Industrial  actlv- 
ity  increasing. 

3. Building  opera- 
tion! large. 

4.B*ports  falling; 
imports  gaining. 

5. Wages  rising. 

6. Strikes  rare. 

7. Industrial  stocks 
rising. 

8. Business  failures 
declining. 

9. Bank  clearings  in- 
creasing. 
10. Bank  statements 
show  credit  ex- 
pansion. 
11. Interest  rates 
rising. 


1 .Prices  high. 

2. Industrial  activ- 
ity at  maximum. 

3. Building  opera- 
tions decline. 

4.2xports  low;  in- 
ports  high. 

5. Wages  high. 

6. Strikes  frequent. 


T. Industrial   stocks 

high  but  declining. 
6. Business   failures 

at  minimum. 
■J.Bank'clearinga 

large. 
10. Bank   statements  uns- 
eat isfactory . 
11. Interest    rates  high. 


Period   of 

Depression 

1 

Prices  low. 

T. industrial    stocks 

2 

Industrial  activ- 

low but    improving. 

ity  at  minimum. 

8. Business   failures 

3 

Building  fairly 

numerous* 

active. 

9. Bank  clearings  low. 

4 

•jtports  high;    Im- 

10.Bank  statements 

ports  low. 

favorable. 

i 

Wages  low. 

11. Interest   rates 

4 

Strikes  rare. 

low. 

Period   of 

Llqulnat Inn 

1. Prices  falling. 
2. Industrial  activ- 
ity curtailed. 
3. Building  opera- 
tions at  minimum. 
4. Exports  gaining; 

imports  falling. 
5. Wages  slowly  de- 
clining. 
6. Strikes  numerous. 
'.Industrial  stocks 

declining. 
8. Business  failures 

increasing. 
9. Bank  clearings  de- 
clining. 
10. Bank  statements 
show  credit  con- 
traction. 
11.  Interest  rates  de- 
clining. 


22  BUSINESS  FORECASTING 

country  are  rushed  to  meet  what  appears  to  be  an  almost  in- 
satiable demand;  at  another,  industry  marks  time  because  the 
demand  for  its  products  seems  to  have  vanished  with  the 
"snows  of  yesteryear." 

Alternate  periods  of  prosperity  and  depression — of  com- 
mercial activity  and  dullness — are  not  of  recent  origin.  Their 
re-occurrence  has  been  noted  for  centuries1  and  the  underlying 
causes  have  engaged  the  attention  of  leading  economists — from 
Smith  and  Mill  to  Rodbertus,  Sombart,  Lescure,  Aftalion,  and 
others  of  even  more  recent  fame — throughout  the  nineteenth 
and  into  the  twentieth  century. 

Wide  variance  of  opinion  exists  as  to  the  cause  of  the  fluc- 
tuations despite  the  attention  which  has  been  directed  to  it. 
Certain  of  the  theories  which  have  gained  the  most  popularity 
will  be  referred  to  in  the  development  of  the  subject,  but  first 
consideration  must  be  given  to  the  manner  in  which  business 
conditions  change. 

The  stages  of  business. — Commerce  is  continually  in  either 
one  of  two  stages — a  period  of  prosperity  which  connotes  ac- 
tivity, or  an  era  of  depression  which  implies  dullness — or  in  a 
period  of  transition  between  the  two.  A  crisis  usually  marks 
the  transition  from  the  period  of  prosperity  to  that  of  depres- 
sion, and  in  this  manner  enables  the  respective  periods  to  be 
readily  differentiated.  Seldom  can  the  line  be  drawn  so  sharply 
when  a  period  of  depression  ends  and  one  of  prosperity  be- 
gins, although  the  inception  of  the  World  War  in  1914  def- 
initely began  the  period  of  prosperity  in  the  United  States 
which  continued  until  1920. 

The  periods  of  transition  between  alternate  stages  of  pros- 
perity and  depression  are  regarded  apart  from  the  conditions 
into  which  they  lead,  and  the  complete  movement  under  which 
business  conditions  tend  to  return  to  a  previous  status  is  thus 
regarded  as  a  cycle  with  four  component  divisions.  These 
divisions  are:  (1)  a  period  of  depression,  with  commercial 
activity  at  its  lowest  ebb;  (2)  a  period  of  recovery,  with 
activity  increasing;  (3)  a  period  of  prosperity,  with  activity 
stimulated  to  a  maximum;  and  (4)  a  period  of  relapse,  with 
activity  declining.  Panics  and  crises  are  not  regarded  as  sep- 
arate periods,  first,  because  the  transition  from  the  third  to  the 
fourth  stage  often  transpires  without  their  occurrence,   and, 

1  Sir  William  Petty,  in  1662,  estimated  the  length  of  the  business  cycle  to  be 
seven  years. 


THE  BUSINESS  CYCLE  23 

secondly,  because  they  may  be  more  accurately  considered  as 
the  final  stage  of  the  prosperity  period.2 

Characteristics  of  a  period  of  depression. — The  depression 
stage  usually  has  a  longer  duration  than  the  other  periods.  In 
fact,  one  theory  of  the  causes  of  business  cycles  has  its  founda- 
tion in  the  assumption  that  a  condition  of  depression  is  the 
normal  status  of  modern  industry.3  The  confidence  which  pre- 
vailed during  the  preceding  era  of  prosperity  has  given  way 
to  a  feeling  of  pessimism.  Caution  in  production  is  the  rule 
of  the  day.  The  tendency  on  the  part  of  one  industry  to  cur- 
tail activity  has  a  consequent  similar  effect  upon  allied  fields, 
with  the  result  that  as  the  period  lengthens,  the  situation  be- 
comes more  pronounced,  rather  than  contrariwise.  Psychology 
plays  an  important  part  in  the  fluctuations  of  business.  Opti- 
mists act  quickly,  pessimists  move  slowly.  Hence,  the  tendency 
for  periods  of  depression  to  be  long  continued  in  comparison 
with  the  other  stages. 

Production  during  a  period  of  depression. — Total  produc- 
tivity materially  declines  during  the  depression  stage,  although 
not  to  the  extent  that  might  reasonably  be  expected. 

Agricultural  production  is  not  seriously  affected,  due  chiefly 
to  the  difficulty  in  regulation.  Farmers  cannot  curtail  opera- 
tions so  readily  as  other  producers,  as  they  must  constantly 
commit  themselves  six  to  twelve  months  in  advance.  More- 
over, there  is  a  greater  economic  waste  involved  in  the  restric- 
tion of  farm  production  owing  to  the  inability  of  the  producers 
to  apply  their  equipment  to  other  use.    Agriculture,  therefore, 

'  A  line  of  differentiation  may  readily  be  drawn  in  the  cases  of  panic,  crisis, 
and  depression.  A  panic  is  that  state  of  business  conditions  when  fear  and 
apprehension  that  preceding  conditions  of  activity  and  prosperity  are  about  to 
be  radically  transformed,  suddenly  inculcate  a  spirit  of  extreme  pessimism  into 
the  business  world  and  cause  transactions  to  be  consummated  without  proper 
regard  for  reasonable  values.  A  crisis  is  that  state  of  business  conditions  when 
it  becomes  apparent  that  for  one  or  more  reasons  commerce  can  not  further  be 
conducted  in  the  same  manner  as  obtained  in  the  immediate  past  and  that  read- 
justment is  imperative.  The  reason  is  usually  the  maladjustment  of  production 
or  the  exhaustion  of  credit  availability.  A  depression  is  that  state  of  business 
conditions  when  commercial  activity  is  abnormally  low.  A  panic  is  invariably 
of  brief  duration;  a  crises  is  more  protracted  as  it  includes  the  final  stages  of 
the  period  of  activity  as  well  as  the  early  stages  of  the  period  of  depression; 
and  a  depression  is  ordinarily  prolonged  over  several  years.  Cf  "Crises  and 
Depressions,"  T.  E.  Burton,  page  6. 

3  "Theory  of  Business  Enterprise,"  T.  B.  Veblen,  chap.  VII. 


24  BUSINESS  FORECASTING 

continues  with  a  regularity  that  is  quite  independent  of  con- 
ditions of  depression  and  prosperity.4 

Industrial  production,  as  distinguished  from  agricultural,  is 
substantially  restricted.  The  demand  has  declined  because 
buyers  are  either  unwilling  or  unable  to  purchase.  Moreover, 
apprehension  concerning  the  course  of  prices  in  the  immediate 
future  has  a  natural  effect  in  causing  producers  to  lessen  the 
risk  of  loss  from  a  further  decline. 

New  construction  tends  to  increase  during  a  period  of  de- 
pression— in  truth,  it  is  one  of  the  factors  which  mitigates  the 
situation  and  assists  in  bringing  about  the  period  of  recovery 
sooner  than  would  otherwise  be  the  case.  The  reason  is  fairly 
obvious.  In  the  preceding  stages  of  the  business  cycle,  prices 
rose,  and  each  succeeding  increase  served  to  discourage  build- 
ing until  costs  lowered.  With  lower  costs  existing  during  the 
stage  of  depression,  construction  is  encouraged  with  the  addi- 
tional stimulus  gained  from  the  postponement  of  previous 
needs. 

Marketing  during  a  period  of  depression. — Commodity 
prices  usually  reach  their  lowest  level  when  depression  is  at 
its  deepest  stage.  As  prices  are  determined  by  conditions  of 
supply  and  demand,  this  would  indicate  a  considerable  lack  of 
balance  between  the  determining  factors.  The  fact  that  the 
supply  exceeds  the  demand  does  not  necessarily  mean  that  an 
abnormal  supply  has  been  produced.  Quite  often — as  was  the 
case  in  1921 — the  cause  of  the  maladjustment  is  to  be  found 
in  decreased  demand.  And  demand  has  fallen  off  chiefly  be- 
cause purchasing  power,  as  represented  by  wages,  has  declined. 

Merchandise  movements,  as  represented  in  the  shipment  of 
commodities  over  the  various  transportation  routes,  likewise 
reach  their  lowest  level.  The  curtailment  of  industrial  activity 
is  accurately  reflected  in  the  volume  of  traffic  which  covers  the 
movement  of  raw  material  to  the  factory  as  well  as  finished  pro- 
ducts from  the  factory  to  the  consumer. 

Foreign  trade  constitutes  a  rather  anomalous  situation.     If 

4  Fluctuations  in  agricultural  production  are  due  chiefly  to  non-economic 
reasons,  and  are  believed,  in  some  circles,  to  be  the  cause  of  business  cycles. 
Sombart's  theory  follows  along  this  line,  as  does  also  Moore's.  "The  funda- 
mental, persistent  cause  of  the  cycles  in  the  yield  of  the  crops  is  the  cyclical 
movement  in  the  weather  conditions  represented  by  the  rhythmically  changing 
amount  of  rainfall;  the  cyclical  movement  in  the  yield  of  the  crops  is  the  funda- 
mental, persistent  cause  of  economic  cycles." — "Economic  Cycles,  Their  Law  and 
Cause,"   Henry  L.  Moore,  p.   149. 


THE  BUSINESS  CYCLE  25 

the  depression  is  world-wide,  both  exports  and  imports  will  be 
abnormally  small.  Should  the  depression  be  confined  to  this 
country,  the  tendency  would  be  for  exports  to  increase  and 
imports  to  decline.  The  low  prices  obtaining  would  encourage 
purchases  from  abroad,  and  would  discourage  shipments  into 
the  country. 

Retail  sales  are  dull  when  times  are  poor.  Industrial  in- 
activity has  resulted  in  reduced  purchasing  power  which  ex- 
presses itself  in  the  volume  of  sales  at  the  retail  stores. 

Labor  conditions  during  a  period  of  depression. — With  in- 
dustrial activity  considerably  below  normal,  employment  con- 
ditions, from  the  standpoint  of  the  workers,  are  distinctly  un- 
favorable during  an  era  of  depression.  The  curtailment  of 
operations  has  caused  a  material  reduction  in  the  number  of 
workers  employed.  A  distinct  labor  surplus  arises,  with  the 
number  unemployed  constantly  increasing  as  part-time  opera- 
tions and  even  complete  suspensions  develop.  Unemployment 
is  at  its  maximum  at  the  final  stage  of  the  depression  period. 

Wages  are  low  when  industrial  inactivity  prevails.  Although 
there  is  a  notable  tendency  at  certain  stages  of  the  business 
cycle  for  the  movement  to  lag  behind  the  current  trend,  wages 
generally  increase  slightly  before  evidences  of  recovery  are  to 
be  noted.  As  has  previously  been  stated,  the  low  level  of 
wages  during  adverse  times  has  its  reflection  in  diminished  pur- 
chasing power  with  resultant  effect  upon  price  levels. 

Industrial  controversies  are  uncommon  at  this  stage.  Em- 
ployees are  not  in  a  position  to  maintain  effectual  resistance 
against  the  policies  of  employers  which  may  be  contrary  to 
the  interest  of  the  workers.  It  is  a  serious  indictment  of  our 
industrial  society  that  in  alternate  periods  of  commercial  and 
industrial  activity  and  dullness,  capital  and  labor  each  contin- 
ually seeks  to  take  advantage  of  the  opportunities  afforded  to 
gain  at  the  expense  of  the  other. 

Immigration  generally  falls  off  during  the  earlier  stages  of 
the  depression  period,  due  to  adverse  labor  conditions.  How- 
ever, relative  conditions  in  the  homeland  of  the  immigrant  and 
in  the  country  to  which  he  migrates,  have  a  greater  influence 
upon  his  movement  than  conditions  in  the  new  land  alone. 

Conditions  of  corporate  prosperity  during  a  period  of  de- 
pression.— Corporate  earnings  are  decidedly  affected  by  a 
period  of  depression.  The  nature  of  the  respective  enterprises 
plays  an  important  part  in  this  regard,  but  in  general  business 


26  BUSINESS  FORECASTING 

profits  materially  decline.  Earnings  of  public  utility  companies 
are  less  adversely  affected  than  those  of  the  pure  industrials, 
because  of  the  relative  stability  of  revenue.5  Many  industrial 
enterprises  are  not  only  obliged  to  suspend  the  payment  of 
dividends  upon  outstanding  stock,  but  experience  difficulty  in 
meeting  the  fixed  charges  upon  bond  obligations. 

Commercial  failures  naturally  increase  with  a  decline  in  cor- 
porate earnings.  The  trend  is  not  uniform,  however,  as  the 
maximum,  in  liabilities  at  least,  is  reached  in  the  period  of 
relapse  when  prices  are  falling  rapidly  rather  than  in  the  en- 
suing period  of  depression  when  prices  tend  to  stabilize  at  the 
lower  levels. 

New  security  issues  decrease  in  the  depression  period  due 
both  to  the  lessened  demand  for  capital  for  new  enterprises  and 
to  the  decreased  new  capital  available.  Current  low  interest 
rates  encourage  corporate  borrowers  to  issue  long  term  bonds 
at  this  stage.  Thus,  long  term  financing  is  the  rule  during 
periods  of  depression,  just  as  short  term  issues  are  used  in 
periods  of  prosperity. 

Stock  exchange  transactions  decrease  in  periods  of  depres- 
sion. As  the  stock  market  constantly  endeavors  to  discount 
the  future,  a  recovery  in  the  market  usually  precedes  a  recovery 
in  general  conditions.  For  this  reason,  activity  on  the  ex- 
changes, especially  in  industrial  common  stocks,  is  often  notice- 
able toward  the  end  of  periods  of  depression.  In  this  manner, 
stock  market  activity  serves  as  an  actual  barometer  and  lends 
color  to  the  belief  that  the  end  of  the  period  is  not  far  distant. 

Conditions  of  finance  during  a  period  of  depression. — A 
decrease  in  bank  clearings  signifies  lessened  business  activity. 
Consequently  the  volume  of  clearings  reaches  its  lowest  level 
in  a  period  of  depression.  This  is  due  to  the  low  level  of 
prices  as  well  as  to  the  smaller  number  of  transactions. 

Bank  statements  occupy  the  anomalous  position  of  being 
most  satisfactory,  from  a  banking  standpoint,  when  conditions 
are  poorest.  The  falling  off  in  business  has  served  to  de- 
crease the  loans  of  the  banks  and  to  increase  the  reserves. 
Both  of  these  factors  improve  the  financial  strength  of  the 
banks. 

6  Indeed  we  learned  during  the  World  War  that  a  period  of  prosperity  and 
rising  prices  is  less  desirable  for  a  public  utility  than  a  period  of  dullness  since 
during  a  period  of  rising  prices,  gross  revenues  do  not  increase  proportionately 
with  the  rise  in  costs. 


THE  BUSINESS  CYCLE  27 

Interest  rates  follow  closely  the  trend  of  conditions  and  are 
lowest  in  the  depression  stage,  for  at  this  time  the  banks  are 
obliged  to  lower  rates  to  keep  their  loanable  funds  employed. 
As  has  been  previously  noted,  the  low  interest  rates  which  pre- 
vail during  periods  of  depression  encourage  corporate  borrow- 
ing for  long  terms,  both  to  refund  existing  loans  that  were 
issued  at  higher  rates  and  to  expand  productive  facilities  in 
anticipation  of  the  ensuing  period  of  recovery. 

Gold  imports  usually  increase  in  periods  of  depression,  since 
decreased  merchandise  imports  and  augmented  exports  cause 
a  favorable  trade  balance  to  exist  which  normally  is  paid  in 
gold  imports.  Gold  production  is  stimulated  in  a  regime  of 
low  prices,  just  as  it  is  discouraged  when  prices  are  high.  An 
increase  in  the  supply  of  gold  may  serve  either  of  two  func- 
tions :  it  may  be  used  to  strengthen  banking  reserves,  or  to  form 
the  basis  for  an  expansion  of  the  volume  of  credit  in  employ- 
ment. The  stimulus  given  to  the  money  market  from  the  gold 
importations  tends  to  shorten  the  period  of  depression,  just  as 
the  exportation  of  gold  during  a  period  of  prosperity  operates 
to  check  the  advancing  movement. 

The  recovery  of  business  activity. — The  transition  from  a 
period  of  depression  to  one  of  recovery  is  of  gradual  develop- 
ment. Just  as  production  is  overdone  in  a  period  of  prosperity, 
it  is  underdone  when  depression  rules,  and  conditions  which 
obtain  when  business  is  dull  tend  to  work  out  their  own  salva- 
tion. Consumption  continues  with  definite  regularity  regard- 
less of  current  conditions,  and  the  surplus  stocks  gained  in 
the  period  of  activity  are  substantially  reduced  during  times 
of  depression. 

Low  production  costs,  accomplished  through  greater  effi- 
ciency of  labor  even  more  than  through  lower  wage  scales,  low 
interest  rates,  and  abnormally  low  costs  of  materials,  encourage 
a  revival  of  industry.  This  factor,  together  with  an  increased 
demand  for  commodities,  which  eventually  results  after  the  ef- 
fect of  underproduction  becomes  apparent,  causes  producers 
to  increase  their  output.  The  reaction  does  not  occur  in  all 
lines  simultaneously,  but  an  improvement  in  one  or  more  of  the 
important  industries  has  a  stimulating  effect  upon  the  others. 
Although  it  is  difficult  to  determine  exactly  when  recovery  be- 
gins, after  the  improvement  has  once  started,  it  gains  momen- 


28  BUSINESS  FORECASTING 

turn  and  "each  effect  reacts  to  strengthen  the  cause  which  pre- 
ceded it."6 

Production  in  a  period  of  recovery. — An  increase  in  produc- 
tivity is  the  chief  feature  of  the  period  of  recovery.  Agriculture 
is  less  affected  than  industrial  operations  and  construction  work, 
due,  as  has  been  previously  stated,  to  its  inherent  inflexibility. 
Industry  throws  off  the  lethargy  which  was  manifest  while  dull- 
ness prevailed  and  there  is  an  appreciable  revival  of  activity  to 
meet  an  increased  demand  which  is  just  asserting  itself.  The 
betterment  comes  slowly  at  first  owing  to  the  caution  of  pro- 
ducers who  are  unable  to  determine  the  degree  of  permanency  in 
the  improvement  of  conditions. 

New  construction  which  includes  highways,  railroad  mileage 
and  rolling  stock,  and  structures  of  all  kinds,  reaches  its  maxi- 
mum during  the  period  of  recovery.  Costs  are  comparatively 
low  at  this  stage.  Moreover,  the  improvement  in  business  con- 
ditions creates  a  feeling  of  optimism  which  encourages  new 
building  generally.  As  expenditures  for  industrial  maintenance 
were  radically  reduced  during  dull  times,  the  recovery  in  busi- 
ness induces  manufacturers  to  restore  their  plants  to  full  effi- 
ciency by  increasing  the  outlay  for  maintenance,  improvements, 
and  betterments  at  this  period. 

Marketing  during  a  period  of  recovery. — Prices  advance 
during  a  period  of  recovery.  In  fact,  the  rise  in  prices — 
which  is  in  itself  the  effect  of  a  maladjustment  of  supply  and  de- 
mand as  is  explained  in  a  following  chapter — is  the  most  im- 
portant single  factor  which  causes  the  trend  of  conditions  to 

'"An  increase  in  the  physical  volume  of  business,  indeed,  seems  to  be  an 
invariable  concomitant  of  revivals;  but  this  increase  usually  sets  in  months, 
even  a  year  or  more,  before  depression  has  relaxed.  .  .  .  The  course  of  whole- 
sale prices  is  an  even  less  reliable  guide.  For,  contrary  to  widely  accepted 
opinion,  prices  do  not  always  rise  in  the  early  stages  of  revival,  and  they  do 
sometimes  turn  upward  during  depression.  As  for  the  money  market,  its  changes 
during  periods  of  business  revival  are  irregular  in  part,  and  in  part  indistin- 
guishable continuations  of  changes  already  under  way  before  the  revival  began. 
For  example,  discount  rates  sometimes  rise  and  sometimes  fall  when  the  change 
for  the  better  occurs;  bank  loans  expand,  but  the  expansion  antedates  the  re- 
vival; the  ratio  of  reserves  to  deposits  may  move  in  either  direction;  the  ratio 
of  loans  to  deposits  usually,  but  not  invariably,  rises;  applications  for  investment 
loans  may  increase  before  the  revival  or  not  until  it  has  come;  the  purchases  of 
bonds  and  stocks  are  similarly  erratic  in  their  behavior,  etc.  The  statistics  of 
unemployment,  monetary  circulation,  savings,  profits,  and  bankruptcies  are  no 
safer  guides  than  those  which  have  been  mentioned.  Thus  there  is  no  certain 
way  of  predicting  when  business  will  begin  to  recover  from  a  prevailing  de- 
pression."— "Business  Cycles,"  W.  C.  Mitchell,  p.  457. 


THE  BUSINESS  CYCLE  29 

move  upward.  At  no  stage  of  the  business  cycle,  however,  do 
prices  change  uniformly.  Wholesale  prices  invariably  move 
first.7  But  wholesale  prices  do  not  advance  evenly.  Those  com- 
modities which  serve  as  a  basis  for  speculative  transactions  on 
the  exchanges — raw  materials  such  as  cotton  and  copper — in- 
crease in  price  before  others  in  which  there  is  less  interest.  Of 
the  raw  materials,  agricultural  products  advance  more  quickly 
than  mineral,  due  to  the  greater  facility  in  adjusting  the  latter 
to  changing  conditions.  Wholesale  prices  of  semi-finished  prod- 
ucts advance  after  the  increase  in  raw  materials,  and  a  natural 
consequence  thereof.  Wholesale  prices  of  finished  products 
similarly  follow  the  advance  in  raw  materials  and  semi-finished 
goods.  Articles  of  consumption  increase  in  price  before  articles 
used  in  production.8 

The  increase  in  productivity  entails  a  larger  volume  of  mer- 
chandise shipments,  in  raw  material  and  partly  finished  form 
from  the  sources  of  derivation  to  the  producers,  and  in  finished 
form  from  producers  to  consumers.  Car  loadings  are  better 
and  the  number  of  idle  freight  cars,  which  reached  its  maxi- 
mum during  the  depression  period,  diminishes  gradually. 

Foreign  trade  follows  no  uniform  trend  during  periods  of 
recovery.  The  normal  influence  will  be  for  exports  to  decline 
somewhat,  due  as  much  to  revived  interest  in  the  domestic  mar- 
ket as  to  advancing  prices.  Imports  increase,  encouraged  by 
higher  prices  which  represent  an  increased  demand  for  goods 
and  larger  purchasing  power.  Yet  comparative  conditions  are 
of  most  significance.  A  change  in  conditions  of  demand  and 
supply  abroad  may  be  one  of  the  chief  determinants — as  was  the 
case  in  1915 — in  bringing  about  the  period  of  recovery. 

Retail  sales  Increase,  but  slowly  at  first.  The  purchasing 
power  of  the  public  determines  the  total  retail  sales,  and,  as  will 
be  seen,  increases  in  wages  lag  behind  in  a  period  of  recovery. 
The  tendency  of  the  general  public  is  to  spend  as  it  earns,  and 
naturally  expenditures  cannot  be   increased  until   income   ad- 

'  This  was  well  demonstrated  in  the  spring  of  1920,  when  many  retailers, 
notably  the  Wanamaker  stores,  reduced  retail  prices  without  a  corresponding 
decline  in  wholesale  costs.  When  the  retailers  found  they  could  not  replenish 
their  stocks  at  lower  prices,  the  reduction  sales  stopped. 

'  "Business  Cycles,"  W.  C.  Mitchell,  p.  461. 


30  BUSINESS  FORECASTING 

varices.  Incidently  this  is  the  main  reason  why  retail  prices  do 
not  advance  so  quickly  as  wholesale.9 

Labor  conditions  during  a  period  of  recovery. — The  num- 
ber of  unemployed  workers  decreases  in  a  period  of  recovery. 
Machine  operation  and  efficiency  of  management  increase  prof- 
its through  the  reduction  of  costs — but  substantial  increases  in 
productivity  can  be  accomplished  only  through  an  increase  in  the 
number  of  workers.  A  progressive  world  constantly  creates 
new  demands  more  than  sufficient  to  occupy  the  time  of  work- 
ers supplanted  by  improved  methods  of  production. 

Wages  increase  gradually,  a  continuation  of  the  trend  which 
began  even  before  the  period  of  depression  ended.  Total 
wages  increase  more  rapidly  than  the  rate  of  wages  which  is 
taken  as  the  usual  criterion.  A  period  of  recovery  brings  full 
time  employment  to  the  workers  which  is,  itself,  equivalent  to 
a  substantial  increase  in  wages.  The  rate  of  wages  increases 
only  after  the  recovery  is  well  under  way  when  increased  liv- 
ing costs  lead  the  workers  to  seek  larger  wages.  Unlike  com- 
modity prices,  there  is  popularly  considered  to  be  an  equilibrium 
of  wages — a  point  at  which  the  income  of  labor  is  sufficient  to 
grant  a  decent  living.  As  wages  have  been  below  this  point, 
a  restoration  to  the  equilibrium  is  sufficient  to  cause  labor  to 
refrain  from  asking  more  for  the  time  being. 

Controversies  are  rare.  Increased  profits  to  employers  cause 
them  to  desire  to  increase  production  and  they  are  content  to 
increase  the  wages  of  labor,  as  the  advance  is  always  more  than 
offset  by  the  increase  in  profit.  The  demands  of  labor  at  this 
stage  are  usually  conservative — the  privations  of  dull  times 
are  too  recent  not  to  have  an  effect.  Cooperation  between 
capital  and  labor  is  most  easily  obtainable  at  this  time. 

Immigration  increases,  but  as  has  been  previously  stated, 
comparative  conditions  at  home  and  abroad  become  the  deter- 
mining factor.  Unskilled  labor  comes  into  greater  demand, 
and  any  substantial  increase  in  this  respect  must  come  through 
immigration. 

"Dr.  E.  Engel,  Chief  of  the  Prussian  Statistical  Bureau,  over  thirty-five  years 
ago,  formulated  four  propositions  with  regard  to  family  budgets,  which  are 
probably  as  true  to-day  as  then:  (1)  the  greater  the  income,  the  smaller  the 
relative  percentage  of  outlay  for  subsistence;  (2)  the  percentage  of  outlay  for 
clothing  is  approximately  the  same,  whatever  the  income;  (3)  the  percentage 
of  outlay  for  lodging,  or  rent,  and  for  fuel  and  light,  is  invariably  the  same, 
whatever  the  income;  and  (4)  as  the  income  increases  in  amount,  the  percentage 
of  outlay  for  sundries  becomes  greater. — "Economic  Crises,"  E.  D.  Jones,  p.  38. 


THE  BUSINESS  CYCLE  31 

Conditions  of  corporate  prosperity  during  a  period  of  re- 
covery.— Corporate  earnings  increase  rapidly  in  a  period  of 
recovery.  Prices  advance  more  quickly  than  production  costs 
and  thus  the  margin  of  profit  becomes  larger.  Not  only  is 
the  profit  on  each  transaction  increased,  but  the  number  of 
transactions  also  multiply,  both  of  which  factors  serve  further 
to  increase  the  total  gain.  Even  after  production  costs  advance, 
the  volume  of  transactions  tends  to  keep  earnings  high.  As 
profit  is  the  predominant  factor  in  business,  the  increase  in 
earnings,  incidental  to  a  period  of  recovery,  stimulates  indus- 
trial activity  and  strengthens  the  cause  which  preceded  it. 

Commercial  failures  show  a  marked  falling-off.  In  an  era 
of  rising  prices,  business  profits  are  secured  without'the  corol- 
lary of  even  ordinary  acumen.  It  is  simply  necessary  to  buy, 
to  hold  for  a  time,  and  then  to  sell.  The  upward  trend  of 
prices  will  bring  a  profit  to  even  the  least  sagacious.  Conse- 
quently bankruptcies  and  insolvencies  become  less  and  less  fre- 
quent. 

New  security  issues  gain  in  volume,  principally  because  of 
the  desire  on  the  part  of  producers  to  expand  their  output 
capacity  to  meet  the  increased  demand  for  their  products. 
The  advance  in  the  charges  for  capital — interest  rates — has 
not  been  sufficient  thus  far  to  discourage  long  term  borrowing. 

A  recovery  in  business  conditions  causes  a  boom  in  the  stock 
market.  More  likely  than  not,  the  boom  will  precede  the  re- 
covery rather  than  follow — a  phenomenon  puzzling  to  one 
who  does  not  appreciate  that  the  market  discounts  all  news, 
good  and  bad  alike,  before  the  happening  of  the  event.  The 
market  value  of  stock  depends  upon  the  capitalized  earning 
power — past,  present,  and  prospective — of  the  issuing  corpora- 
tion.10 As  the  period  of  recovery  means  prospective  increased 
earning  power  to  the  company,  stocks  ordinarily  advance  before 
the  earnings  become  actual.  This  accounts  for  declines  later 
when  profits,  although  greatly  in  excess  of  those  for  preceding 
periods,  are  less  than  have  been  anticipated.  The  stocks  which 
declined  the  most  during  the  depression  stage — especially  those 

"An  enterprise  which  earns  $100,000  annually  is  estimated  to  have  a  value 
of  about  $1,000,000  although  the  physical  property  may  have  cost  considerably 
less.  This  process  of  valuation  is  termed  "capitalizing  the  earning  power"  on 
a  10  per  cent  basis.  The  value  of  each  share  fluctuates  in  accordance  with 
changes  in  the  capitalized  earning  power  of  the  company  rather  than  with 
changes  in  the  value  of  the  physical  assets. 


32  BUSINESS  FORECASTING 

which  were  obliged  to  suspend  dividend  payments — rise  more 
rapidly  than  the  others,  in  anticipation  of  an  early  restoration 
of  dividends.  Common  stocks  rise  more  rapidly  than  preferred 
both  because  they  had  declined  more  in  the  preceding  period 
and  because  the  potential  dividends  on  the  common  stock  are  in 
proportion  to  the  total  earnings  of  the  company  whereas  the 
preferred  is  in  most  instances  limited  to  a  comparatively  small 
fixed  return,  regardless  of  abundant  earnings. 

Conditions  of  finance  during  a  period  of  recovery. — Bank 
clearings  gain  in  amount  due  to  increased  prices  as  well  as  to 
a  greater  volume  of  transactions.  Bank  statements  show  an 
increase  in  loans  and  in  money  in  circulation  with  a  correspond- 
ing decline,  in  the  ratio  of  reserves  to  liabilities.  Interest  rates 
— except  the  rate  on  call  loans  which  is  fixed  daily  and  therefore 
fluctuates  constantly — strengthen  with  an  increase  in  the  de- 
mand for  credit  accommodation  and  tend  to  advance,  although 
well  after  the  recovery  has  set  in.11  Yet  it  has  been  noted  that 
interest  rates  lower  even  after  the  period  of  recovery  has  be- 
gun.12 

International  movements  of  gold,  exports  and  imports,  are 
smallest  at  this  stage.  The  influx  which  was  created  during  the 
era  of  depression  by  the  influence  of  low  domestic  prices  is 
checked  by  the  advance  in  the  price  level.  Moreover,  the  ex- 
port of  gold  which  eventually  follows  high  prices  is  not  reached 
until  later  in  the  cycle. 

n  Prof.  Irving  Fisher  has  suggested  that  the  lagging  adjustment  of  the  rate 
of  interest  to  changing  conditions  may  account  for  the  phenomena  of  business 
cycles.  Borrowers  take  advantage  of  low  interest  rates  to  increase  loans — 
deposit  currency — which  increase,  according  to  Professor  Fisher's  theory,  causes 
prices  to  rise.  The  rate  of  interest  should  always  be  high  enough  to  prevent 
inflation,  i.e.,  the  granting  of  credit  beyond  actual  requirements,  or  over- 
borrowing.  The  belated  rise  in  interest  rates  checks  these  operations  and 
makes  for  the  decline  which  eventually  follows. 

13  "Nevertheless,  discount  rates  usually  average  less  in  the  first  year  of  busi- 
ness revival  than  in  the  last  year  of  business  depression." — "Business  Cycles," 
W.  C.  Mitchell,  p.  466. 


Chapter  III 

THE  BUSINESS  CYCLE    (Continued) 

The  development  of  the  period  of  prosperity. — The  re- 
covery in  business  is  really  a  transition  stage  between  periods 
of  depression  and  prosperity.  Although  slow  at  first,  the  better- 
ment intensifies  as  it  continues.  Just  as  the  pendulum  swings 
below  a  theoretical  normal  during  the  depression  stage,  in  a 
period  of  recovery  the  upward  swing  carries  it  above  the  line  of 
normalcy.  Psychology  plays  an  important  part.  A  spirit  of 
optimism  now  pervades  commerce  and  stimulates  production 
generally.  Enthusiasm  is  epidemic.  Increasing  prices  are  bring- 
ing larger  profits  and  the  volume  of  business  grows  continually. 
Business  has  recovered  from  its  slump  and  enters  the  stage  of 
prosperity. 

Production  during  a  period  of  prosperity. — The  high  prices 
which  are  obtainable  in  a  period  of  prosperity  might  reasonably 
be  expected  to  cause  agriculturists  to  increase  their  acreage. 
Weather  conditions  during  the  growing  season,  however,  exert 
a  more  powerful  influence  than  fluctuating  acreage.  Experi- 
ence has  taught  the  farmers  to  act  conservatively  in  this  respect. 
The  record  high  prices  secured  for  the  1919  crops  encouraged 
large  harvests  in  1920.  Prices  declined  to  such  an  extent  in 
the  meantime,  however,  that,  although  the  volume  of  agri- 
cultural production  in  1920  substantially  exceeded  that  of  1919, 
its  value  was  forty  per  cent  less.1 

Industrial  production  has  now  reached  its  maximum.  The 
demand  for  goods  seems  insatiable.  Market  price  becomes  of 
secondary  importance  to  the  major  problem  of  securing  de- 
liveries. The  lure  of  abnormally  high  profits  causes  producers 
to  become  over-enthusiastic  regarding  future  requirements  and 
the  manufacturing  plants  of  the  country  operate  almost  to  the 

'Some  specific  illustrations  follow: 

Corn:          1920— 3,232,367,000  bushels $2,189,721,000 

1919—2,917,450,000  bushels 3,934,234,000 

Cotton :       1920—      12,987,000  bales 914,590,000 

1919—      11,030,000  bales 1,967,143,000 

Tobacco :    1920—1,508,064,000  pounds 298,001,000 

1919—1,389,458,000  pounds 542,547,000 

33 


34  BUSINESS  FORECASTING 

limit  of  their  capacity.  Only  a  shortage  in  labor  prevents  even 
greater  production. 

Construction  work  declines  at  this  stage.  The  increase  in 
costs — labor  as  well  as  materials — causes  new  building  to  be 
curtailed.  Difficulty  in  obtaining  labor  and  materials  is  a  factor 
as  troublesome  as  advancing  prices.  Projects  accordingly  are 
postponed  until  such  time  as  conditions  are  more  favorable. 
Practically  all  construction  entered  upon  at  this  stage  is  for 
industrial  purposes.  The  close  of  a  period  of  prosperity  finds 
construction  at  its  lowest  point. 

Marketing  during  a  period  of  prosperity. — Prices  continue 
to  advance  throughout  the  period;  in  fact,  a  decline  in  the  level 
of  prices  indicates  the  end  of  the  period.  As  long  as  the  de- 
mand for  commodities  and  services  exceeds  the  supply,  prices 
will  advance.  It  is  only  after  supply — which  has  been  con- 
stantly increasing — approximates  the  demand  that  any  retro- 
gression is  probable.  The  increasing  level  of  prices  brings 
increased  profits  but  not  in  the  same  proportion  as  formerly 
since  production  costs  are  mounting  even  more  rapidly  as  the 
prosperity  stage  develops.  Labor  is  demanding  an  increasing 
share  in  the  distribution;  and  is  less  efficient  even  at  higher 
wages.  Raw  material  costs  are  constantly  advancing,  as  are 
also  supplementary  costs  such  as  the  charge  for  borrowed  capital. 
Prices  do  not  stop  advancing  suddenly.  An  increasing  resis- 
tance develops  as  they  go  higher  and  further  advances  become 
more  gradual.  Toward  the  close  of  a  period  of  prosperity 
prices  appear  to  be  stabilizing  at  the  high  level. 

Commodity  shipments  reach  a  maximum  at  this  time.  So 
great  is  the  traffic  that  actual  congestion  at  points  along  the 
principal  arteries  compel  the  placing  of  embargoes  on  shipments. 
The  number  of  idle  cars  declines  and  the  height  of  the  period 
often  finds  the  usual  surplus  of  cars  converted  into  a  deficit. 
So  important  do  adequate  transportation  facilities  become  that 
consumers,  in  their  eagerness  to  secure  goods,  are  often  willing 
to  pay  a  substantial  premium  for  prompt  delivery. 

Foreign  trade  figures  are  likely  to  be  misleading  at  this  stage. 
Because  of  high  price  levels,  the  value  of  both  exports  and 
imports  has  been  materially  enhanced;  in  volume,  however,  the 
gain  is  not  so  great.  Exports  tend  to  decline  due  to  the  high 
domestic  prices  and  to  the  inability  of  producers  to  meet  the 
home  demand.  Imports  increase  for  the  same  reason  that 
exports  diminish. 


THE  BUSINESS  CYCLE  35 

Retail  sales  greatly  increase.  The  inherent  inclination  of 
the  average  American  to  spend  as  much  as  he  earns  finds  con- 
stant expression  in  the  sales  of  the  retail  stores.  The  increase 
is  notably  in  articles  of  luxury  rather  than  uniform  in  all  lines. 

Labor  conditions  during  a  period  of  prosperity. — Unem- 
ployment ceases  to  be  a  problem  in  periods  of  prosperity  as 
the  difficulty  is  in  securing  workers  for  jobs  rather  than  jobs  for 
workers.  The  labor  problem,  instead  of  being  entirely  solved, 
assumes  a  different  aspect,  even  more  troublesome  than  before. 
As  increased  production  is  the  chief  desideratum,  labor  has  the 
upper  hand  and  is  in  a  position  to  compel  employers  to  make 
conditions  of  employment  more  satisfactory  to  the  workers. 
Just  as  employers,  in  times  of  depression,  force  labor  to  accept 
the  terms  of  the  former,  in  times  of  activity,  labor  goes  to  the 
opposite  extreme  and  prescribes  the  conditions  under  which  it 
will  work. 

Wages  increase  most  rapidly  at  this  stage.  An  incessant 
demand  for  greater  output,  a  shortage  in  the  number  of  workers, 
competition  between  rival  industries,  increased  living  costs,  and 
other  factors  induce  the  workers  to  seek  higher  wages.  The 
ease  with  which  increases  are  secured  early  in  the  period  en- 
courages further  demands  at  short  intervals  and  causes  produc- 
tion costs  to  mount  more  quickly  than  selling  prices.  Incidently 
labor  becomes  less  efficient  as  the  period  continues,  as  the  neces- 
sity of  doing  good  work  is  no  longer  imperative.  Wages  tend 
upward  throughout  the  period  and  do  not  reach  their  highest 
point  until  business  has  begun  the  retrograde  movement. 

This  period  is  marked  by  many  industrial  controversies.  As 
the  workers  continue  to  demand  higher  wages — both  in  the 
form  of  increased  rates  and  shorter  hours — the  resistance  of 
the  employers  becomes  stronger.  In  the  early  stages,  increases 
are  freely  granted  as  enhanced  earnings  more  than  counterbal- 
ance the  effect.  But  as  production  costs  increase  more  propor- 
tionately than  selling  prices,  the  profit  margin  lessens  and 
employers  find  themselves  less  inclined  to  grant  further  in- 
creases. The  controversies  frequently  develop  into  strikes 
which  tend  to  be  longer  continued  as  the  period  progresses,  due 
to  the  increasing  resistance  of  the  employers  as  well  as  to  the 
better  economic  position  of  the  workers. 

Immigration  increases  during  prosperous  times.  In  addition 
to  the  natural  attraction  in  the  form  of  high  wages,  the  short- 
age of  domestic  labor  encourages  employers  to  seek  an  ade- 


36     .  '  BUSINESS  FORECASTING 

quacy  of  workers  from  foreign  lands  and  induce  immigration 
that  otherwise  might  not  have  resulted. 

Conditions  of  corporate  prosperity  during  a  period  of 
prosperity. — Business  profits  enormously  increase.  In  addi- 
tion to  the  ordinary  margin  of  profit  which  would  be  gained 
if  prices  remained  stable,  the  continual  advance  in  prices  acts 
to  magnify  the  earnings.  Even  after  the  margin  of  profit 
diminishes,  for  a  time  the  increase  in  the  volume  of  transactions 
makes  the  total  net  profit  as  great  as  ever.  The  increase  in 
profits  is  the  impelling  force  which  causes  business  endeavor 
to  reach  such  a  high  degree  of  activity  at  this  stage.  The  psy- 
chology of  getting  the  most  "while  the  going  is  good"  stimulates 
the  entire  commercial  field. 

Commercial  failures  continue  to  decline  in  number  as  the 
prosperity  period  lengthens.  This  is  a  natural  corollary  to  the 
increase  in  business  earnings.  The  continued  decrease  in  the 
number  of  failures  is  a  criterion  of  the  degree  of  prosperity 
which  exists  and  is  also  a  good  barometer  of  the  approach  of 
the  end  of  the  period  when  the  inevitable  reaction  must  come. 
An  extremely  low  percentage  in  commercial  failures  is  a  warn- 
ing of  financial  storms  in  the  not  distant  future. 

New  security  issues  reach  their  highest  point  at  this  time. 
The  nature  of  the  securities  offered  changes  with  each  period 
of  the  cycle.  In  the  depression  stage,  new  capital  was  secured 
through  the  sale  of  long  term  bonds  on  low  interest  rates.  In 
the  prosperity  stage,  high  interest  rates  confine  corporate  bor- 
rowing to  short  terms,  and  cause  most  of  the  new  capital  to  be 
raised  through  the  sale  of  stock  which  bears  a  high  dividend 
rate  the  payment  of  which,  however,  is  contingent  upon  earnings 
and  is  not  fixed  and  definite  as  in  the  case  of  bonds.  This  era 
is  notable  for  the  marketing  of  vast  quantities  of  securities 
of  doubtful  value.  The  promise  of  unreasonably  high  profits 
upon  such  stocks  appeals  to  credulous  investors  who  find  them- 
selves in  the  unusual  position  of  having  a  surplus  income. 

Stock  exchange  transactions  are  large.  The  increased  in- 
comes of  many  individuals  encourage  them  to  enter  the  specula- 
tive markets.  Trading  decreases  in  volume,  however,  as  the 
period  continues,  and  often  the  height  of  the  prosperity  era 
finds  comparative  dullness  on  the  exchanges.  The  stock  market 
is  looking  ahead,  and  the  close  of  the  period  usually  finds  that 
prices,  especially  of  those  stocks  which  advanced  most  at  the 
beginning,  have  already  started  to  decline. 


THE  BUSINESS  CYCLE  37 

Conditions  of  finance  during  a  period  of  prosperity. — 
Bank  clearings  reach  a  maximum  at  the  close  of  the  period. 
At  that  time  prices  are  highest  and  the  volume  of  transactions 
is  greatest.  Clearings  do  not  decrease  until  well  after  the 
retrograde  movement  has  begun. 

Bank,  statements  reflect  large  increases  in  loans  and  deposits, 
and  money  in  circulation,  as  well  as  a  substantial  decrease  in 
the  ratio  of  cash  reserve  to  obligations.  The  gain  in  business 
activity  has  been  facilitated  to  a  marked  degree  by  the  granting 
of  bank  credits.  Eventually  the  credit  availability  at  the  banks 
approaches  the  point  of  exhaustion,  and  then  the  end  of  the 
prosperity  era  is  in  sight. 

Interest  rates  follow,  rather  than  keep  pace  with  the  trend 
of  conditions.  The  increase  in  loans  and  decrease  in  the  ratio 
of  reserves  compel  bankers  to  increase  the  charge  for  borrowing 
to  protect  their  position  as  well  as  to  check  inflation.  At  first, 
advancing  interest  rates  are  ineffectual  due  to  the  large  profit 
margins,  but  as  earnings  decrease  and  interest  charges  increase, 
the  increased  cost  of  credit  effectually  checks  borrowing. 

A  period  of  prosperity  affects  the  gold  situation  mainly  by 
causing  a  decrease  in  production.  Increased  cost  of  production 
coupled  with  a  stationary  market  price — for  gold  cannot  change 
in  price  as  under  modern  monetary  systems  gold  is  price — results 
in  a  distinct  curtailment  in  the  output.2  As  a  result  of  increased 
imports  and  diminished  exports,  there  is  a  normal  tendency  for 
gold  to  be  exported  at  this  stage. 

The  beginning  of  retrogression. — A  period  of  prosperity 
tends  to  work  out  its  own  undoing.  The  main  factor  is  the 
decrease  in  earnings  which  is  the  combined  resultant  of  various 
developments  during  the  period.  Production  costs  in  the  form 
of  expenditures  for  material  and  wages,  decreased  efficiency 
of  workers,  and  interest  charges,  encroach  upon  sales  prices 
which  cannot  interminably  be  raised.  The  increase  in  the  supply 
is  eventually  sufficient  to  meet  the  demand  and  the  restoration 
of  this  balance  alone  places  an  economic  check  upon  further 
advances.  The  cost  of  production  did  not  determine  the  price 
while  there  was  a  shortage  and  will  not  determine  the  current 
price  when  a  surplus  exists.     Moreover,  greater  resistance  de- 

1  Prior  to  the  World  War,  the  average  annual  gold  production  of  the  world 
was  about  $500,000,000.    In  1919,  it  had  declined  to  about  $3  50,000,000. 

44390 


38  BUSINESS  FORECASTING 

velops  as  prices  increase,  and  demand  actually  declines  due  to 
unwillingness  rather  than  to  inability  to  purchase.3 

A  financial  crisis  often  marks  the  end  of  a  period  of  pros- 
perity and  the  beginning  of  retrogression.  The  crisis  is  attrib- 
utable chiefly  to  the  use  of  credit.  As  is  shown  later,  periods 
of  prosperity  and  depression  would  probably  exist  even  were 
credit  not  used.  But  credit  permits  the  expansion  of  business 
to  go  far  beyond  what  would  otherwise  be  the  case.  Credit  is 
based  upon  confidence,  and  in  business,  confidence  is  predicated 
upon  profits.  While  prices  are  advancing,  profits  are  easily 
obtained  and  there  is  general  confidence  in  the  situation.  As 
profits  decrease,  apprehension  develops  and  credit  becomes  in- 
creasingly difficult  to  obtain.  Furthermore,  the  credit  which 
one  firm  extends  to  another  is  largely  dependent  upon  the  credit 
the  first  firm  can  obtain  from  its  bank  and  that  in  turn  is 
limited  by  the  credit  position  of  the  bank.  Bank  loans  are 
easily  obtainable  at  the  beginning  of  the  period  of  recovery 
as  the  position  of  the  banks  is  strong;  but  as  loans  expand  with 
the  increase  in  business  activity,  the  banks  eventually  are  obliged 
to  curtail  their  loans  and  the  credit  necessary  to  finance  a  contin- 
uation of  the  expansion  of  business  becomes  obtainable  only  on 
restrictive  terms. 

Retrogression  starts,  therefore,  when  prices  begin  to  fall. 
Prices  decline  because  of  a  restoration  of  an  approximate  bal- 
ance between  conditions  of  demand  and  supply.  Curtailment 
of  credit  not  only  serves  to  check  advancing  prices — since  in- 
ability to  borrow  is  tantamount  to  inability  to  buy — but  often 

a  "The  world  of  business  is  a  system  comprising  numberless  independent  enter- 
prises, bound  together  by  industrial,  commercial  and  financial  ties.  For  the 
continuance  of  prosperity  it  is  indispensable  that  a  certain  balance  be  maintained 
between  the  fundamental  processes  which  constitute  the  activity  of  this  system. 
The  demand  for  goods  of  every  kind  must  keep  pace  with  the  increasing  supply, 
despite  the  steadily  rising  prices,  the  cost  of  raw  materials  must  not  increase  too 
much  in  comparison  with  the  selling  prices  of  manufactured  goods;  mercantile 
collections  must  grow  with  mercantile  credits;  bank  reserves  must  expand  with 
demand  liabilities;  the  cost  of  living  must  not  rise  much  faster  than  money 
incomes;  banks  and  investors  must  continue  able  to  provide  the  ever-increasing 
loan  funds  required  by  business  enterprises;  and  the  like.  If  there  occurs  a 
serious  maladjustment  in  the  rate  at  which  any  of  these  factors  are  growing  in 
relations  to  the  others,  some  business  enterprises  will  suffer  loss  of  profits. 
Then  the  bonds  which  unite  different  enterprises  will  become  channels  through 
which  the  injury  will  spread  to  other  enterprises,  just  as  they  were  recently 
channels  for  the  spread  of  prosperity.  Unless  the  original  injury  is  promptly 
healed,  there  is  grave  danger  that  the  cumulation  of  prosperity  will  be  con- 
verted into  a  cumulation  of  depression." — "Business  Cycles,"  W.  C.  Mitchell, 
p.  473. 


THE  BUSINESS  CYCLE  39 

precipitates  a  financial  crisis  in  the  transition  from  the  period 
of  prosperity. 

Panics  and  crises. — Panics  are  caused  by  a  sudden  loss  of 
confidence  on  the  part  of  the  business  world.4  The  belief  that 
prices  are  about  to  decline  prompts  holders  of  commodities 
and  securities  to  liquidate  at  the  earliest  possible  moment. 
Naturally  this  is  coincident  with  a  disinclination  on  the  part 
of  buyers  to  purchase.  Others  are  obliged  to  sell  to  meet 
credit  obligations  which  they  are  required  to  reduce.  Supply 
far  exceeds  demand  for  the  time  being,  and  a  drastic  fall  in 
prices  results.  Sellers  are  unable  to  understand  why  there  is 
such  a  lack  of  purchasing  demand  and  are  seized  with  fear.  In 
their  fright,  they  offer  their  holdings  at  sacrifice  prices.  In  a 
market  of  this  kind,  with  many  sellers  and  few  buyers,  prices 
drop  precipitously.  The  decline  in  prices  brings  severe  losses 
to  those  who  were  carrying  large  stocks  or  who  had  committed 
themselves  on  future  contracts  at  high  unit  prices. 

The  transition  between  periods  of  prosperity  often  occurs 
without  the  concurrence  of  a  panic  or  even  of  a  crisis.  The 
efficiency  of  the  Federal  Reserve  System  in  meeting  a  financial 
emergency  was  well  demonstrated  in  1920,  and  there  is  reason 
to  believe  that  panics,  at  least  in  the  former  sense  of  the  word, 
will  rarely  occur  in  the  United  States. 

Panics  and  crises,  when  they  do  occur,  are  of  limited  dura- 
tion. At  such  a  time,  even  the  worst  is  discounted  and  a  more 
reasonable  attitude  is  quickly  assumed  by  the  business  world. 
The  demand  for  the  immediate  liquidation  of  loans — a  policy 
both  fatuous  and  ruinous  as  an  intelligent  creditor  does  not 
collect  his  debts  by  forcing  debtors  into  bankruptcy — ceases 
and  with  it  terminates  the  critical  stage.  But  business  does  not 
resume  its  former  status.  A  panic  marks  but  the  beginning 
of  the  retrogressive  movement. 

Production  during  a  period  of  retrogression. — Agriculture 

*  "A  more  complete  and  philosophical  solution  of  the  problem  is  found,  it 
seems  to  me,  in  the  constitution  of  human  nature  itself,  which  bears  with  im- 
patience the  dullness  of  a  monotonous  level,  and  rapidly  passes  from  one 
extreme  to  another.  Enthusiasm  and  despondency  are  equally  epidemic.  When 
prices  are  rising  and  when  profits,  even  when  only  on  paper,  roll  up  rapidly, 
everybody  is  eager  to  buy.  But  when,  after  this  eagerness  has  evaporated  and 
suspicion  succeeds  to  confidence,  the  current  turns  the  other  way,  everybody 
desires  to  sell,  prices  fall,  and  until  the  remembrance  of  the  losses  thus  incurred 
is  obliterated  by  time,  nobody  is  willing  to  make  fresh  ventures." — Matthew 
Marshall  in  Engineering  Magazine,  vol.  V,  p.  415,  quoted  by  T.  E.  Burton  in 
"Panics  and  Depressions." 


40  BUSINESS  FORECASTING 

is  not  largely  affected  by  the  retrogression  of  business.  The 
farmers  have  a  more  inherent  belief  in  the  fundamental  sound- 
ness of  the  country  regardless  of  the  sequence  of  good  times 
and  bad  times,  induced  to  no  small  extent  by  the  inability  to 
regulate  production  similarly  as  in  the  case  of  the  industrial 
plans.  Workers  who  left  agriculture  to  gain  the  larger  wages 
obtainable  in  the  factories,  return  to  the  farm  with  the  advent 
of  an  industrial  depression. 

Industrial  production  falls  off.  Stocks  on  hand  are  more 
than  adequate  to  meet  the  existing  demand  which  is  but  a  frac- 
tion of  its  former  volume.  Moreover,  the  decline  in  prices  im- 
pels producers  to  curtail  operations  only  to  the  orders  on  hand. 
Incidentally  the  cancellation  of  unfilled  orders  placed  during 
the  period  of  prosperity  is  usually  greater  in  volume  than  new 
orders  being  received.  Just  as  in  a  rising  market,  each  new 
advance  gave  an  additional  gain  to  manufacturers,  in  a  falling 
market  each  further  decline  means  added  loss  to  producers  in 
proportion  to  the  quantity  of  merchandise  they  are  carrying. 
As  prices  continue  to  fall,  the  curtailment  of  industrial  activity 
becomes  more  general,  and  leads  into  the  period  of  depression 
where  it  reaches  its  lowest  phase. 

Construction  operations  are  decidedly  limited  at  this  stage. 
The  spirit  of  pessimism  in  the  market  is  more  than  sufficient 
to  offset  the  encouragement  offered  through  lower  construction 
costs.  There  is  also  a  tendency,  now  that  prices  are  falling, 
to  wait  for  the  bottom  rather  than  begin  while  the  downward 
trend  continues. 

Marketing  during  a  period  of  retrogression. — Prices  de- 
cline at  this  stage,  rapidly  at  first,  but  more  gradually  as  the 
period  continues.  The  lack  of  uniformity  in  the  fluctuations 
is  again  apparent.  Wholesale  prices  decline  earlier  than  retail. 
Articles  of  production  fall  before  articles  of  consumption. 
Raw  material  prices,  especially  of  mineral  products,  drop  in 
advance  of  those  of  manufactured  goods.  The  lack  of  sup- 
port to  the  market  which  accounts  for  the  continued  decline  in 
price  levels  is  a  reflection  of  the  reduced  purchasing  power  of 
the  public  coincident  with  current  wage  reductions.  As  prices 
decline,  profits  are  adversely  affected,  and  inactivity  spreads 
throughout  commerce. 

Merchandise  shipments  fall  off.  The  deficit  in  idle  cars  is 
eliminated,  and  successive  reports  soon  indicate  an  increasing 


THE  BUSINESS  CYCLE  41 

surplus.  Traffic  congestion  ends  and  deliveries  are  effected 
with  promptness. 

Foreign  trade  receives  greater  attention.  The  decrease  in 
the  domestic  demand  causes  producers  to  seek  markets  abroad. 
The  decline  in  prices  is  of  material  assistance,  and  there  is  a 
certain  tendency  for  exports  to  increase.  Imports  lower  both 
in  volume  and  in  value. 

Retail  sales  do  not  decline  immediately.  Wages — which 
determine  purchasing  power — are  not  reduced  at  first  and 
consequently  retail  sales  do  not  feel  the  effect  of  the 
change  in  condition  until  the  reductions  actually  become 
effective. 

Labor  conditions  during  a  period  of  retrogression. — The 
curtailment  of  industrial  activity  brings  a  corresponding  re- 
duction in  the  number  of  workers.  In  some  instances,  the 
same  result  occurs  through  part-time  operations.  Unemploy- 
ment which  becomes  manifest  at  this  stage  does  not  become 
critical  until  retrogression  has  developed  into  actual  depression. 

The  trend  of  wages  is  downward.  Reductions  are  not  put 
into  effect  at  the  beginning  of  the  period,  however.  In  many 
cases  wage  agreements  guaranteeing  existing  scales  for  a 
definite  period  prevent  immediate  reductions.  Moreover, 
workers  strenuously  resist  reductions,  and  in  preference  to 
strikes  and  complete  suspension  of  operations,  employers  con- 
tinue the  existing  rate  temporarily.  As  the  period  continues, 
producers  are  obliged  to  reduce  wages  to  continue  operations 
since  wages  comprise  on  the  average  about  two-thirds  of  the 
entire  production  cost.  The  resistance  on  the  part  of  the 
workers  becomes  less  effective  in  view  of  lower  living  costs 
and  the  growth  in  the  number  of  unemployed.  Production 
costs  are  lowered  not  alone  through  diminished  wage  scales 
but  through  the  increased  productivity  of  the  individual 
worker. 

Frequent  controversies  occur  at  the  beginning  of  the  period 
when  wage  reductions  are  initiated.  Controversies  which  de- 
veloped into  strikes  in  the  period  of  activity  now  develop  into 
lockouts  since,  in  many  instances,  employers  can  more  econom- 
ically suspend  operations  than  continue.  As  industrial  activity 
lessens,  the  workers  are  more  disposed  to  accept  the  reductions 
as  inevitable,  and  controversies  become  comparatively  less 
numerous. 

Immigration  receives  a  decided  check.    The  labor  shortage 


42  BUSINESS  FORECASTING 

has  changed  into  a  surplus  and  the  inducement  of  plenty  of 
work  at  high  wages  no  longer  exists.  Incidentally  organized 
labor  brings  pressure  to  bear  upon  Congress  to  take  action 
to  restrict  immigration  at  this  phase. 

Conditions  of  corporate  prosperity  during  a  period  of 
retrogression. — The  decline  in  prices  is  accompanied  by  a 
corresponding  decline  in  business  profits.  The  principal  loss 
is  incurred  in  the  shrinkage  in  the  value  of  inventories  held 
over  from  the  preceding  period.  The  income  statements  of 
the  leading  American  industrial  companies  for  1920  bear  elo- 
quent testimony  in  this  respect.  But  even  before  the  loss  on 
inventories  has  been  written  off,  the  profits  of  the  enterprises 
during  succeeding  periods  are  substantially  less  than  during  the 
prosperous  years.  Dividends,  especially  extra  disbursements 
which  are  common  in  a  period  of  prosperity,  are  materially 
reduced,  and  in  many  cases  are  omitted  to  conserve  the  assets 
of  the  company  to  meet  the  uncertain  days  which  are  ahead. 

Business  failures  increase.  The  failure  of  one  or  two  large 
enterprises  is  often  a  feature  of  the  critical  stage  which  usually 
marks  the  end  of  the  period  of  prosperity.  Failures  at  the 
beginning  of  the  period  are  comparatively  few  in  number  but 
the  total  liabilities  are  large.  As  prices  continue  to  fall,  busi- 
ness men  find  it  increasingly  difficult  to  conduct  profitable  op- 
erations, especially  new  enterprisers  who  began  during  the  fair 
weather  of  rising  prices  and  who  find  the  procurement  of 
profits  under  the  new  order  a  task  requiring  a  considerable 
degree  of  business  sagacity. 

New  security  issues  decrease  abruptly  with  the  beginning  of 
the  downward  movement  and  offerings  during  this  period  are 
limited  to  refunding  operations,  extending  the  maturity  of 
loans  previously  made. 

Just  as  improvement  in  business  conditions  causes  a  boom 
in  the  stock  markets,  so  retrogression  brings  a  slump.  The  bull 
movement  is  succeeded  by  bear  operations  even  before  the 
reaction  in  business  has  developed.  The  market  falls  and 
trends  downward  until  definite  promise  of  recovery  is  in  sight. 

Conditions  of  finance  during  a  period  of  retrogression. — 
Bank  clearings  decline  slowly  due  more  to  a  decrease  in  the 
volume  of  business  than  to  the  price  decline,  although  both 
are  important  factors.  The  volume  of  transactions  reaches  a 
minimum  during  this  period  rather  than  during  the  succeeding 
stage  of  depression. 


THE  BUSINESS  CYCLE  43 

Bank  statements  reflect  the  liquidation  through  which  the 
market  is  proceeding.  Loans  do  not  decline  at  first  to  any 
substantial  extent  because  of  the  inability  of  borrowers  to 
market  their  holdings — a  condition  which  has  recently  gained 
the  appellation  of  "frozen  credit."  But  loans  gradually  are 
paid  off  and  deposits  decline  in  accordance.  The  cash  position 
of  the  banks  is  strengthened  with  the  decrease  in  liabilities, 
and  credit  becomes  more  easily  obtainable. 

Interest  rates  do  not  immediately  decline  but  follow  their 
usual  habit  of  lagging  behind.  The  credit  position  of  the 
banks  does  not  improve  at  once  since  outstanding  loans  are 
liquidated  only  with  extreme  difficulty.  Eventually,  however, 
the  decline  in  business  activity  brings  betterment  to  the  position 
of  the  banks  and  interest  rates  lower  in  consequence. 

Gold  exports  are  checked  at  this  stage  by  an  increase  in 
merchandise  exports  and  a  decline  in  imports  which  restores 
a  state  of  balance  to  total  international  shipments  and  receipts. 
This  trend  continues  as  depression  develops  and  eventually 
brings  gold  imports  in  settlement  of  the  excess  of  exports. 

The  complete  cycle. — The  business  cycle  has  now  swung 
back  to  the  period  of  depression  which  was  the  point  of  origin 
in  the  present  discussion.  The  manner  in  which  business  con- 
ditions follow  an  unending  cyclical  movement  having  been 
discussed,  some  attention  will  now  be  given  to  the  cause  of  the 
fluctuations. 


Chapter  IV 

THE  INFLUENCE  OF  A  MONEY  ECONOMY 

The  effect  of  a  money  economy. — An  approach  to  the  task 
of  determining  the  causes  of  the  undulations  of  business  must 
have  its  origin  in  an  appreciation  of  the  institution  of  money 
economy  which  dominates  commercial  endeavor.  Production 
and  distribution  should  be  the  two  most  significant  terms  in 
business,  but  the  commercial  world  subordinates  them  to  the 
twin  deities  of  price  and  profit. 

Price  is  the  amount  of  money  for  which  commodities  ex- 
change. Profit  is  the  difference  between  sales  price  and  cost 
of  sales,  and  is  universally  comprehended  in  terms  of  money. 
Men  engage  in  commerce  for  the  profit  to  be  derived,  and 
habitually  conceive  this  reward  in  terms  of  money.  True,  in 
the  ultimate  sense,  men  do  not  strive  for  money  but  for  the 
command  over  the  world's  goods  which  money  gives.  Subjec- 
tively, men  work  that  they  may  be  in  a  position  to  satisfy 
their  desires;  but  objectively,  they  work  for  money.1 

Business  is  conducted  for  the  sake  of  profits,  and  since  profit 
in  commerce  is  measured  in  terms  of  money,  the  existing  com- 
mercial organization  is  considered  to  be  a  money  economy.  It 
is  not  altogether  propitious  that  this  should  be  the  case.  As 
a  medium  of  exchange,  money  facilitates  the  conduct  of  busi- 
ness immeasurably.  But  men  have  come  to  regard  money  as 
much  more  than  a  simple  medium  of  exchange.  It  serves  as  a 
standard  of  value  in  comparing  the  worth  of  commodities;  as 
a  store  of  value  in  enabling  persons  to  transfer  present  goods 
and  services  into  future  commodities;  and  as  a  standard  of 
deferred  payment  in  the  performance  of  credit  transactions. 
The  universal  satisfaction  with  which  money  serves  as  a  me- 
dium of  exchange,  has  led  men  to  believe  that  it  serves  the 
other  functions  with  equal  adequacy.  Unfortunately,  this 
condition  does  not  obtain,  and  this  brings  about  one  of  the 

1  "Commodities,  those  economic  goods  which  are  the  real  objects  of  human 
desire,  apparently  occupy  a  secondary  place  in  the  business  world,  for  in  the 
conscious  purposes  and  desires  of  men  money  is  the  real  thing." — "Money  and 
Currency,"  Jos.  F.  Johnson,  p.  10. 

44 


INFLUENCE  OF  A  MONEY  ECONOMY       45 

factors  contributing  to  the  sequence  of  business  prosperity  and 
depression. 

Subordination  of  production. — But  the  most  important 
effect  of  the  money  economy  upon  commerce  is  the  fact  that 
it  dominates  productivity.  Production,  as  the  underlying  mo- 
tive of  business,  should  be  the  controlling  factor  in  com- 
mercial endeavor,  and  money  should  be  one  of  the  agencies  by 
which  productivity  is  facilitated.  It  is  indeed  an  ironical  de- 
velopment in  commerce,  that  money,  one  of  the  means  to  an 
end,  should,  to  the  average  individual,  become  the  conscious 
end.  In  the  true  sense,  the  prosperity  of  any  country  depends 
upon  its  productivity,  or  in  other  words,  upon  an  adequacy  of 
goods.  But  the  money  economy  requires  that  the  prosperity 
of  any  individual  in  that  country  be  measured  in  the  adequacy 
of  money.  As  the  country  is  comprised  of  the  individuals,  the 
adequacy  of  money  unfortunately  proves  a  more  potent  factor 
than  the  adequacy  of  goods.2 

An  analysis  of  price. — As  an  inquiry  into  the  causes  of  pe- 
riods of  business  prosperity  and  depression  resolves  itself  into 
the  question  of  money-making,  and  as  that  is  directly  depen- 
dent upon  the  relationship  of  prices,  an  analysis  of  the  method 
by  which  prices  are  determined  becomes  of  major  significance. 
The  task  is  not  easy.  The  simple  statement  that  the  price  of  any 
commodity  depends  upon  the  relationship  between  the  demand 
and  the  supply  of  the  commodity  merely  scratches  the  surface 
of  the  problem.  Consideration  must  be  given  to  the  manner 
in  which  demand  is  created  before  it  can  be  measured;  and 
also  to  the  manner  in  which  the  current  supply  came  into 
existence. 

1  "To  the  nation  the  making  of  money  is  important  in  a  fashion  quite  different. 
Comfort  and  misery  do  not  depend  upon  the  aggregate  of  money  incomes  re- 
ceived by  its  citizens;  they  do  depend  upon  the  abundance  of  useful  goods. 
Efficiency  in  producing  useful  goods  is  important  to  an  individual  chiefly  because 
it  enhances  his  ability  to  make  money;  money-making  is  important  to  a  nation 
chiefly  because  it  enhances  the  efficiency  of  production.  Natural  resources, 
mechanical  equipment,  and  industrial  skill  are  factors  of  fundamental  import- 
ance under  any  form  of  economic  organization.  But  where  money  economy 
dominates,  natural  resources  are  not  developed,  mechanical  equipment  is  not 
provided,  industrial  skill  is  not  exercised,  unless  conditions  are  such  as  to 
promise  a  money  profit  to  those  who  direct  production.  The  elaborate  coopera- 
tive process  by  which  a  nation's  myriad  workers  provide  for  the  meeting  of 
each  other's  needs  is  thus  brought  into  precarious  dependence  upon  factors 
which  have  but  a  remote  connection  with  the  material  conditions  of  well-being — 
factors  which  determine  the  prospects  of  making  money." — "Business  Cycles," 
W.  C.  Mitchell,  p.  21. 


46  BUSINESS  FORECASTING 

Price  comprehends  two  elements:  cost  plus  profit,  or,  cost 
minus  loss.  Business  men  always  regard  price  with  relation 
to  cost,  as  herein  lies  the  element  of  profit,  which,  as  has  been 
previously  stated,  is  the  apparent  reason  causing  them  to  fol- 
low commercial  pursuits.  Surprising  would  it  be,  therefore, 
to  find  any  single  factor  exerting  greater  influence  upon  the 
price  of  any  commodity  than  its  cost  of  production.3 

Effect  of  cost  of  production. — Under  conditions  of  free 
competition,  the  main  factor  in  the  establishment  of  price  is 
cost  of  production.  Goods  which  cost  nothing  to  produce 
have  no  price;  they  are  free.  But  cost  of  production  is  not 
the  only  factor  affecting  prices.  In  fact,  changing  conditions 
of  demand  and  supply  are  continually  causing  prices  to  be  es- 
tablished seemingly  independent  of  the  cost  of  production. 
During  the  first  three  months  of  1920  raw  cotton  was  selling 
at  over  40  cents  a  pound,  and  during  the  last  three  months 
of  the  same  year,  it  was  quoted  below  20  cents;  changes  in 
production  cost  could  not  and  did  not  account  for  the  change 
in  the  market  price.  Other  factors,  to  which  consideration 
is  about  to  be  given,  often  have  greater  influence  than  the 
cost  of  production,  but  in  the  long  run  production  cost  is 
the  basis  of  the  equilibrium  to  which  price  movements  tend 
to  return  after  the  other  forces  have  spent  themselves. 

Factors  in  price  determination. — Prices  are  popularly  as- 
sumed to  be  determined  by  conditions  of  demand  and  supply, 
but,  while  this  is  true,  it  would  be  more  precise  to  add  "and 
by  prospective  profits."  Demand  measures  value,  but  supply 
determines  price.  Producers  therefore  always  endeavor  to 
regulate  the  supply  of  any  commodity  in  adjustment  with  the 
demand  at  a  price  which  will  permit  a  reasonable  margin  of 
profit  over  the  cost  of  production. 

The  regulation  of  the  supply  to  meet  the  demand  is  a  prob- 
lem of  large  proportions.  It  is  more  than  the  biggest  problem 
in  business — it  is  business  itself.  The  ability  of  men  success- 
fully to  contend  with  this  problem  measures  their  business 
capacity  and,  by  the  same  token,  their  monetary  reward. 
Every  individual  in  commerce  has  this  problem,  in  direct  or 
indirect  form,  constantly  before  him.  In  its  essence,  the  task 
is  one  of  predetermination,  and  those  individuals  are  most 
successful  who  have  the  best  foresight. 

*  Cost  of  production  is  used  here  in  its  broadest  sense.  It  includes  distribution 
cost  as  well  as  production. 


INFLUENCE  OF  A  MONEY  ECONOMY       47 

The  problem,  like  "all  Gaul,"  is  divided  in  three  parts, 
as  is  shown  in  the  accompanying  analysis.  The  first  task  is 
to  estimate  what  the  demand  will  be  at  a  future  time,  i.e., 
when  the  new  supply  reaches  the  market,  upon  the  basis  of  a 
given  price  which  is  estimated  in  accordance  with  production 
cost.  The  second  is  to  produce  the  new  supply  in  the  desired 
quantity  despite  physical  restrictions  which  constantly  arise  in 
production.    The  third  is  to  predetermine  the  prospective  cost 


PRICED 


Demand  (A)« 


DIAGRAM  ANALYSIS  OF  PRICE 

Utility   (want-satisfying  power) 

■s    Substitution  (of  another  means  of  satis- 
fying this  desire) 


Purchasing 
position 


Present' 


Supply  (B)    -j 


Future 


Ability  to  buy 
Willingness  to  buy 


f  Estimated  demand  (A)  based  upon 
selling  price  (M)  which  permits  a 
reasonable  profit  (N)  over  prospec- 
tive cost  of  production   (P). 

Physical  limitations  upon  production: 
Weather   conditions 
Labor  conditions 
Transportation  conditions 
Financial  conditions 
Output  capacity 


of  production.  In  each  case,  the  possibility  of  error,  and 
consequently  of  loss,  since  the  business  man  must  back  his 
judgment  with  his  money,  is  extremely  large. 

Estimating  the  demand. — The  first  part  of  the  major  prob- 
lem— and  deserving  the  title  of  major  problem — is  the  task 
of  estimating  what  the  demand  will  be  when  the  new  supply 
reaches  the  market.  Over  a  reasonably  long  period,  demand 
varies  with  price.  At  a  given  price,  there  is  a  certain  demand, 
represented  by  those  willing  to  pay  that  price,  which  is  known 
as  the  effective  demand.  The  demand  at  a  lower  price  would 
normally  be  greater,  and  this  is  considered  the  potential  de- 
mand. The  effective  demand  naturally  receives  the  greater 
attention. 

Demand  is  desire  qualified  by  purchasing  position.  Most 
individuals  have  unlimited  desires  but  limited  purchasing  abil- 
ity.    Hence,  demand  is  not  merely  the  total  desires.     Desire 


48  BUSINESS  FORECASTING 

is  predicated  upon  utility  which  is  the  power  of  the  commodity 
to  satisfy  wants.  A  community  desires  wheat  because  its  prod- 
uct, bread,  satisfies  hunger.  But  utility  alone  does  not  deter- 
mine desire,  as  the  substitution  of  another  commodity,  corn, 
for  example,  can  satisfy  the  same  desire. 

Effect  of  purchasing  position. — Purchasing  position,  as 
well  as  desire,  determines  the  effective  demand.  The  pur- 
chasing position  of  an  individual  depends  upon  his  ability  and 
willingness  to  purchase.  The  ability  of  prospective  customers 
to  purchase  may  be  gauged  usually  from  conditions  of  em- 
ployment and  corporate  prosperity,  which  are  taken  up  in 
detail  in  a  later  chapter.  One  of  the  contributing  causes  in 
the  rise  in  price  levels  between  1914  and  1920  was  the  in- 
creased purchasing  power  of  the  public.  Willingness  to  pur- 
chase is  not  always  synonymous  with  ability.  The  "buyer's 
strike"  during  the  latter  part  of  1920  was  quite  irrespective 
of  the  ability  of  purchasers  to  make  payment.  Because  rela- 
tive willingness  to  purchase  is  of  psychological  creation,  its 
predetermination  is  difficult.  Yet  an  unwillingness  to  purchase 
is  always  evident  in  a  declining  market;  the  unusual  phase  of 
the  1920  situation  was  that  it  was  one  of  the  causes  of  the 
decline. 

The  first  problem  of  the  producer,  therefore,  is  to  estimate 
the  prospective  demand  at  a  certain  price.  He  appreciates 
that  any  error  he  commits  at  this  point,  or,  for  that  matter,  at 
any  other  step  in  his  problem,  will  tend  to  make  the  basic  price 
different  from  what  he  anticipates,  and  he  acts  with  greater 
caution  by  reason  thereof.  The  experience  of  previous  opera- 
tions is  his  chief — often  his  only — criterion,  and  invaluable 
as  this  assistance  is,  the  producer  is  apt  to  overemphasize  its 
importance.  A  more  scientific  attempt  on  the  part  of  the 
producers  to  meet  the  demand  on  the  basis  of  the  new  rather 
than  the  old  conditions  would  prove  decidedly  efficacious  in 
reducing  the  range  of  price  fluctuations. 

Regulating  the  supply. — The  second  part  of  the  problem — 
after  the  prospective  demand  has  been  estimated — is  that  of 
regulating  the  supply  in  accordance  therewith.  The  existing 
supply — which  incidently  came  into  existence  as  a  result  of  cal- 
culations similar  to  those  now  being  considered — is  a  factor 
of  importance  only  if  the  quantity  is  abnormally  large.  The 
close  of  the  World  War  in  1918  found  enormous  stocks  on 
hand  of  many  commodities,  such  as  copper  and  wool,  which 


INFLUENCE  OF  A  MONEY  ECONOMY       49 

naturally  tended  to  curtail  further  production  in  those  lines. 
Usually,  however,  the  current  supply  suffices  chiefly  to  meet 
the  consumptive  requirements  until  the  new  supply  is  available 
and  to  provide  a  reserve — termed  carry-over — to  meet  a  pos- 
sible deficit  in  the  forthcoming  supply.4 

Limitations  upon  supply. — The  achievement  of  a  desired 
production  is  conditioned  upon  the  successful  forecast  of  the 
effect  of  forces  both  economic  and  non-economic,  which  im- 
pose physical  limitations  upon  productivity.  The  restricting 
elements  are  the  conditions  of  weather,  labor,  transportation, 
finance,  and  output  capacity.  In  agricultural  production,  the 
acreage  planted  does  not  determine  the  total  yield;  the  weather 
conditions  between  the  planting  and  the  harvest  exert  a  power- 
ful influence.  Since  weather  conditions  may  not  be  determined 
more  than  a  few  days  in  advance,  the  problem  of  regulating 
the  agricultural  supply  to  meet  the  demand  is  highly  difficult. 
Labor  conditions,  also,  create  physical  restrictions.  The  years 
1918  and  1919  were  marked  by  decreased  production  caused 
by  labor  shortage  aggravated  by  numerous  controversies  and 
decreased  efficiency.  Conditions  of  transportation  at  times 
are  detrimental  to  productivity  as,  for  example,  in  1920  when 
the  railroad  congestion  made  traffic  most  uncertain.  The 
condition  of  the  money  market  is  another  factor  which  often 
tends  to  handicap  production.  The  credit  needed  to  finance 
the  operations  of  the  producers  may  be  obtainable  only  on 
unsatisfactory  terms;  during  the  years  1920  and  1921  indus- 
trial borrowers  were  obliged  to  pay  as  high  as  9  and  10  per 
cent,  and  even  higher,  to  secure  funds.  The  output  capacity 
may  be  insufficient,  at  certain  times,  especially  periods  of  busi- 
ness revival  following  periods  of  curtailed  production,  to  meet 
the  estimated  demand. 

Producers  are  obliged  to  make  allowance  for  each  of  these 
contingencies.  If  proper  allowance  is  not  made,  and  the  error 
may  as  readily  create  an  oversupply  as  a  shortage,  the  effect 
will  be  to  cause  an  inequality  to  exist  between  conditions  of 
demand  and  supply  with  consequent  fluctuations  in  price. 

Prospective  cost  of  production. — The  third  part  of  the 
problem  is  to  estimate  the  prospective  cost  of  production.  Al- 
though it  has  been  previously  stated  that  cost  of  production 

4  Out  of  an  average  annual  production  of  about  800,000,000  bushels  of  wheat 
in  the  United  States,  over  100,000,000  bushels  are  usually  carried  over  into  the 
next  harvest. 


50  BUSINESS  FORECASTING 

was  the  main  factor  in  the  establishment  of  price,  a  line  of 
demarcation  must  be  drawn  between  actual  cost  and  prospec- 
tive cost.  The  actual  cost  of  production  determines  profit — 
an  all-important  factor — but,  strange  to  say,  has  comparatively 
little  influence  upon  current  price.5 

The  prospective  cost  of  production  is  the  point  at  which 
the  predetermination  of  supply  begins.  After  the  prospective 
cost  has  been  estimated,  a  profit  margin  is  added, — which 
competitive  conditions  require  to  be  a  reasonable  amount — 
and  the  total  is  the  price  which  producers  expect  to  realize.6 
This  is  the  price  which  is  used  as  a  basis  in  estimating  the 
prospective  demand  as  has  previously  been  shown.  Estimates 
of  prospective  productive  costs  are  based  almost  entirely  upon 
experience.  Actual  costs  do  not  always  verify  prospective 
costs,  due  to  changes  in  economic  conditions  between  successive 
periods  of  production.  Seldom  do  conditions  remain  stable 
for  an  appreciable  time.  The  undulations  of  business  cause 
the  trend  of  commercial  activity  and  prosperity  constantly  to 
swing  upward  or  downward.  As  production  requires  time,  the 
prospective  cost  will  approximate  the  actual  only  if  proper 
allowance  has  been  made  for  current  trend  of  conditions. 

The  prospective  cost  of  production  affects  price  to  the  ex- 
tent that  it  governs  supply.  But  an  error  in  estimating  the 
prospective  cost  does  not  affect  price,  as  by  the  time  the  error 

5  "Note  that  even  when  the  computation  of  cost  of  production  appears  to  be  a 
backward-looking  computation,  it  is  only  as  a  basis  for  a  further  and  forward- 
looking  computation.  Costs  that  have  been,  have  no  direct  bearing  upon  present 
price.  The  supply  is  as  it  is,  no  matter  what  the  costs  are  now  seen  to  have 
been.  The  cost  of  production  that  is  really  and  ultimately  significant  in  modify- 
ing price  is  the  prospective  cost  as  over  against  the  prospective  price.  And  in 
most  occupations,  the  computation  is  for  a  fairly  long  term — a  season,  or  a 
succession  of  years,  or  even  a  lifetime.  The  bearing  of  cost,  such  as  it  is — 
and  however  tardy  is  its  working  on  the  volume  of  supply, — is  significant  only 
for  such  persons  as  undertake  the  cost,  and  for  the  supply  which  it  affects,  and 
for  the  period  upon  which  it  bears.  Prices  are  influenced  by  it  by  virtue  of  the 
fact  that  there  are  always  enough  marginal  men  in  any  competitive  production 
to  bring  about  a  reduction  of  the  supply,  if  the  relative  advantages  of  the 
industry  appear  likely  to  suffer.  And  there  are  always  men  in  other  industries, 
near  to  their  respective  margins,  who  will  be  attracted  to  any  particular  in- 
dustry if  its  relative  advantages  appreciably  increase." — "The  Economics  of 
Enterprise,"   H.  J.   Davenport,   p.   69. 

6  "Generally  speaking,  prices  may  be  considered  competitively  fixed  and  in  their 
normal  relation  to  costs  when  the  industry  as  a  whole  has  earned  an  average 
gross  profit  of  anywhere  from  9  to  12  per  cent  on  investment." — "A  Statistical 
Analysis  of  the  Relation  Between  Cost  and  Price,"  Kemper  Simpson,  in  The 
Quarterly  Journal  of  Economics,  vol.  XXXV,  No.  2,  p.  271. 


INFLUENCE  OF  A  MONEY  ECONOMY        51 

is  ascertained,  the  price  will  have  been  determined  by  existing 
conditions  of  demand  and  supply.  But  errors  in  estimating 
prospective  costs  affect  profit,  which  is  the  difference  between 
price  and  actual  cost,  and  in  this  manner  affect  future  prices,  as 
will  be  seen. 

Effect  upon  price. — If  the  estimated  demand  has  been  cor- 
rectly forecast,  and  the  supply  has  been  accurately  regulated 
in  accordance,  the  price  of  the  commodity  will  be  M.  If  like- 
wise, the  prospective  cost  of  production  coincides  with  the 
actual  cost,  the  profit  margin  will  be  N,  which  affords  a  reason- 
able rate  of  return.  A  reasonable  rate  of  return  will  neither 
encourage  nor  discourage  production  and  will  tend  toward 
stability.  Desirable  though  this  result  would  be,  it  seldom 
happens,  due  to  the  great  difficulty  in  correctly  forecasting  all 
three  contingencies. 

If  inaccurate  appraisal  has  been  made  of  either  the  demand 
or  the  supply,  or  both,  the  price  will  not  be  M.  If  the  actual 
demand  exceeds  the  supply,  the  price  will  be  M+  and  the  profit 
will  be  N+5  or  an  abnormal  rate  of  return.  This  will  stimulate 
production  and  likely  cause  overexpansion  later.  If  the  actual 
demand  is  less  than  the  supply,  the  price  will  be  M —  and  the 
profit  will  be  N — ,or  a  subnormal  rate  of  return.  This  will 
discourage  production  and  tend  to  non-employment  and  indus- 
trial depression  until  the  balance  is  restored.  In  both  of  these 
cases,  the  actual  profit,  N+  or  N — ,  as  the  case  might  be,  would 
be  subject  to  revision  in  proportion  to  the  extent  to  which  the 
actual  cost  agrees  with  the  prospective  cost. 

Why  prices  rise. — A  period  of  marked  business  activity  has 
its  origin  in  a  rise  of  prices.7  This  is  fundamental.  Later  the 
increased  business  activity  will  contribute  to  a  further  rise  but 
this  will  be  after  the  upward  swing  is  well  under  way.  Now 
prices  do  not  rise  automatically,  but  because  of  changes  in  the 
relationship  of  supply  and  demand. 

At  a  certain  time  it  becomes  apparent  that  the  current  sup- 
ply of  a  given  commodity  is  insufficient  to  meet  the  demand. 
This  is  because  producers  have  erred  in  estimating  the  de- 
mand or  in  regulating  the  supply.  Either  they  have  underesti- 
mated the  demand  or  have  not  made  proper  allowance  for  the 

*  "In  such  a  period  the  potent  fact  which  serves  as  incentive  to  the  acceleration 
of  business  is  a  rise  of  prices." — "Theory  of  Business  Enterprise,"  T.  B.  Veblen, 
P.  194. 


52  BUSINESS  FORECASTING 

physical  restrictions  upon  production.8  While  demand  ex- 
ceeds supply,  the  price  of  the  commodity  rises  and  the  profit 
to  producers  increases.  Since  the  cost  of  production  is  not, 
at  the  outset,  affected,  a  marked  tendency  arises  to  expand 
productivity  to  gain  the  increased  profit.  This  brings  a  stim- 
ulus to  allied  industries,  especially  those  supplying  producer's 
goods9  to  the  industry  concerned,  which  will  tend  to  increase 
prices  and  profits  in  those  lines  similarly  as  in  the  original. 
Sooner  or  later,  the  increased  production  catches  up  with  the 
existing  demand  and  as  this  fact  becomes  apparent,  a  tendency 
will  develop  for  prices  to  return  to  the  previous  level  which 
gave  reasonable  but  not  large  profits.  Resistance  to  the  de- 
cline will  be  met  in  increased  production  costs — material  as 
well  as  labor — which  have  developed  in  the  meanwhile  and 
which  presently  would  operate  to  lower  the  profit  formerly  ob- 
tainable at  the  original  cost.  This  resistance  cannot  be  effec- 
tual, however,  as  buyers  will  pay  only  a  price  justified  by  exist- 
ing conditions  of  demand  and  supply.  While  demand  exceeds 
supply,  high  prices  are  obtainable;  but  when  the  supply  equals 
or  exceeds  the  demand,  the  premium  cannot  continue.  Prices 
are  due  to  swing  back.  Artificial  measures,  such  as  the  with- 
holding of  commodities  from  the  market, — a  policy  which  in 
itself  is  a  confession  of  defeat  and  simply  evidences  the  weak- 
ness of  the  market  to  buyers  and  thereby  drives  prices  further 
down — cannot  stay  the  swing.10 

Relationship  of  credit. — Credit,  i.e.,  commercial  borrow- 
ing, never  causes  alternate  periods  of  prosperity' and  depres- 
sion.   It  merely  magnifies  their  effects.    An  expansion  of  credit 

8  An  unfortunate  aspect  of  the  present  organization  of  industrial  society 
wherein  men  seek  primarily  to  "make  money"  rather  than  to  promote  the  gen- 
eral welfare  by  contributing  toward  .maximum  productivity  is  illustrated  at  this 
point.  Producers  aim  to  undersupply  rather  than  exactly  meet  the  demand — an 
application  of  Gregory  King's  law,  evolved  centuries  ago,  that  a  short  crop 
yields  a  larger  return  than  a  large  crop.  The  total  wheat  production  in  the 
U  'ted  States  in  1915  was  1,025,801,000  bushels  valued  at  $942,303,000;  in 
1916 — the  following  year — the  crop  was  only  639,886,000  bushels  but  was  valued 
at  $1,025,765,000.  The  production  declined  38  per  cent,  but  the  value  of  the  crop 
increased  11  per  cent. 

'Producer's  goods  are  those  used  in  the  creation  of  commodities,  e.g.,  machin- 
ery; whereas  consumer's  goods,  such  as  clothing  and  foodstuffs,  are  those  im- 
mediately and  completely  utilized. 

"The  attempt  on  the  part  of  the  agriculturists  during  the  latter  part  of  1920 
to  withhold  the  current  crops,  especially  cotton  and  wheat,  from  the  market 
because  of  dissatisfaction  with  current  prices,  not  only  failed  to  strengthen  prices, 
but  actually  caused  prices  to  decline  further. 


INFLUENCE  OF  A  MONEY  ECONOMY        53 

permits  profits  to  increase  more  rapidly  by  reason  of  facili- 
tating the  increase  in  production,  but  thereby  shortens  the 
period  of  increased  activity.  A  curtailment  of  credit  precipi- 
tates the  downward  price  movement,  and  incidently  the  ensuing 
period  of  depression,  which  would  be  just  as  certain  to  occur 
when  the  supply  met  the  demand,  although  less  abruptly,  if 
there  were  no  such  an  institution  as  credit.  Panics  are  credit 
phenomena;  periods  of  prosperity  and  depression  are  not. 

Effect  of  changes  in  the  demand. — Demand  is  never  stable; 
apart  from  other  reasons,  it  fluctuates  with  changes  in  the  sup- 
ply, a  condition  which  renders  even  more  difficult  the  problem 
of  regulating  the  supply.  Because  of  this  factor,  the  success 
met  in  the  endeavor  to  make  supply  approach  demand  in  a 
period  of  prosperity  does  not  depend  entirely  upon  increased 
production.  At  the  outset  the  appreciation  of  a  shortage 
further  accentuates  the  demand;  but  toward  the  latter  part 
of  the  period,  when  supply  is  rapidly  increasing,  demand  is 
actually  declining.  Producers  are  operating  at  top  speed  and 
do  not  appreciate  this  fact  at  the  proper  time.  The  close  of  a 
period  of  prosperity,  therefore,  usually  finds  the  rate  of  pro- 
duction still  increasing  with  the  demand  rapidly  falling  off. 
These  countermovements  have  a  tendency  to  make  the  read- 
justment more  drastic. 

Why  depression  ensues. — The  forces  which  cause  prices 
to  rise  must  eventually  act  in  reverse  manner  to  accomplish  a 
decline  as  soon  as  equality  between  conditions  of  demand 
and  supply  is  approached.  The  decline  of  prices  should  not, 
of  itself,  bring  about  a  period  of  depression,  as  a  restoration 
of  the  former  price  should  still  allow  a  reasonable  margin  of 
profit.  But,  as  has  previously  been  stated,  production  costs 
have  advanced  in  the  interim.  The  inability  of  producers 
promptly  to  adjust  production  costs,  primarily  wages,11  to  sales 
prices  while  prices  are  moving  downward — perhaps  they  might 
accomplish  this  more  readily  if  they  were  consistent  when 
prices  are  rising — impels  a  radical  curtailment  of  production. 
Another  important  reason  for  the  adoption  of  this  curtail- 
ment policy  is  to  be  found  in  a  continuance  of  the  decline  in  the 

"An  industrial  survey  conducted  by  The  New  York  Herald  in  1921  showed 
that  labor  received  85  cents  out  of  every  dollar  of  cost  in  steel  making;  75  cents 
out  of  each  dollar  of  cost  in  bituminous  coal  mining;  85  cents  in  building  con- 
struction; 38  cents  in  ship  building;  60  cents  in  railroading;  33  cents  in  furni- 
ture; 35  cents  in  shoe  manufacturing;  and  50  cents  in  textiles. — Cf.  The  Ne<w 
York  Herald,  May  8,  1921. 


54  BUSINESS  FORECASTING 

demand  already  evidenced  toward  the  close  of  the  period  of 
prosperity  but  gaining  in  intensity  as  prices  lower. 

The  curtailment  of  industrial  activity  is  synonymous  with  a 
period  of  business  depression.  Decreased  productivity  means 
unemployment  and  lower  wages,  in  short,  decreased  purchas- 
ing power,  which  tends  further  to  weaken  the  situation  and 
to  prolong  the  period  of  depression.  As  in  a  period  of  rising 
prices,  an  incorrect  estimate  of  demand  causes  overproduction; 
just  so  in  a  period  of  falling  prices  an  incorrect  estimate  of 
demand  causes  underproduction.  Production  may  be  post- 
poned, but  consumption,  particularly  of  the  necessities  of  life, 
continues  constantly.  Underproduction  eventually  causes  a 
shortage  to  exist,  and  as  this  shortage  becomes  apparent,  the 
instinct  of  wanting  what  cannot  be  had  takes  hold,  demand 
quickens,  more  so  because  certain  wants  have  been  postponed, 
and  the  upward  swing  begins. 

Summary. — Alternate  periods  of  prosperity  and  depression 
are  money  phenomena.  Because  of  the  dominance  of  an  econ- 
omy of  money,  production  and  distribution,  which  should  be 
the  most  cogent  factors  in  business,  are  subordinated  to  price 
and  profit,  both  of  which  are  money  terms.  The  prosperity  of 
a  country  should  depend  upon  its  production  of  goods,  and  as 
long  as  an  adequacy  is  provided,  prosperity  should  continue. 
But  the  existing  economy  of  money  requires  that  the  prosper- 
ity of  each  individual  be  measured  in  the  adequacy  of  money 
he  possesses  rather  than  of  goods  he  produces.  Hence,  a  nation 
comprises  a  body  of  individuals  each  seeking  an  adequacy  of 
money  rather  than  of  goods.  Were  money-making  predicated 
upon  productivity,  an  adequacy  of  money  would  presuppose  an 
adequacy  of  goods.  But  money-making,  as  the  dominant  influ- 
ence, as  often  as  not  accomplishes  the  opposite  result.  The  obli- 
gation of  producers  to  regulate  supply  in  accordance  with  the 
demand — that  profit  may  be  derived — exemplifies  an  unfor- 
tunate effect  of  a  money  economy.  12 

Under  the  influence  of  the  money  economy,  producers  are 
obliged  to  consider  money-making,  which  represents  prosper- 
ity to  them  as  individuals,  before  maximum  productivity  which 
means  prosperity  to  the  community.     Because  of  this,  a  con- 

M  "In  the  world  of  reality  we  have  insatiable  wants  to  deal  with,  and  an 
unusable  surplus  of  all  things  can  never  be  produced.  An  unsaleable  surplus 
of  many  things  can  be  produced." — "Introduction  to  Rodbertus'  Overproduction 
and  Crises,"  by  John  B.  Clark,  p.  3. 


INFLUENCE  OF  A  MONEY  ECONOMY        55 

stant  endeavor  is  made  to  regulate  production  with  the  esti- 
mated demand  in  such  manner  as  to  derive  the  largest  profit. 
Prosperity  of  producers,  therefore,  is  not  dependent  upon 
their  capacity  to  produce,  which  should  be  the  basis  from  the 
standpoint  of  the  community  welfare,  but  upon  their  clever- 
ness in  regulating  production. 

The  regulation  of  production  is  a  problem  in  compound 
forecasting  to  which  an  erroneous  solution  creates  a  maladjust- 
ment of  supply  and  demand.  The  lack  of  balance  has  resulted 
from  an  inaccurate  forecast  of  the  demand  or  of  the  effect  of 
physical  limitations  upon  the  production  of  the  desired  supply. 
The  chief  difficulty  is  in  the  predetermination  of  the  demand 
as  it  is  easier — comparatively  so  only — to  regulate  the  supply 
in  accordance.  Supply  must  always  be  handmaid  to  demand, 
a  most  fickle  mistress.  The  principal  error  in  the  predeter- 
mination of  demand  is  the  failure  of  producers  fully  to  ap- 
preciate that  business  conditions  are  never  static.  Yesterday's 
experience  is  a  fair  criterion  of  to-morrow's  demand  only  when 
qualified  by  the  developments  in  the  meantime.13 

13  If  we  trust  to  history,  then,  the  answer  seems  to  be  that  the  cyclical  move- 
ment is  part  and  parcel  of  the  normal  system  of  industry.  If  we  ask  economic 
theory  for  an  explanation  of  why  this  should  be  so,  the  answer  seems  clear. 
The  outstanding  feature  of  modern  industry  is  the  division  of  labour.  This 
division  of  labour  has  three  consequences.  The  first  is  that,  as  the  value  of 
all  products  depends  on  a  demand  outside  and  independent  of  the  maker — no 
man  "makes"  value,  but  only  things  to  which  value  is  attached  by  the  desires 
and  purchasing  power  of  others — the  individuals  of  the  community  are  daily 
perilling  their  resources  on  the  chance  of  finding  a  paying  demand  from  other 
people  for  their  goods,  while,  all  the  time,  there  is  any  number  of  causes  acting 
on  this  demand,  increasing,  diminishing,  or,  it  may  be,  totally  extinguishing  it. 
What  is  more,  every  advance  in  wealth  and  culture  tends  to  make  this  demand 
more  capricious,  and,  with  every  change  in  demand,  some  industry  or  other 
goes  on  short  time.  For,  while  the  simple  wants  of  a  poor  community  may  be 
fairly  counted  on  to  produce  a  steady  demand,  the  desires  and  activities  of  a 
wealthy  community  are  infinitely  varied  and  constantly  changing,  and  every 
such  change  affects  a  long  chain  of  industries  in  which  huge  capitals  are 
specialised  and  literally  "sunk,"  and  thousands  of  labourers  are  employed. 

The  second  is  that  every  industry  depends  for  its  smooth  working  on  other 
industries.  The  production  of  any  and  every  good  which  man  consumes  being 
divided  up  into  many  successive  and  complementary  industries,  every  individ- 
ual industry  depends,  first,  on  getting  the  supply  of  things  necessary  for  its 
operations  from  a  preceding  industry;  and  second,  on  its  products  being  taken 
up  by  the  succeeding  industries  which  carry  them  one  stage  nearer  to  the  final 
good  which  people  demand  for  a  living.  The  drop  of  a  single  link  in  the  long 
chain  causes  dislocation  in  every  trade  which  connects  the  first  raw  material 
obtained  from  the  earth  with  the  finished  article  sold  across  the  counter.  And 
this  danger  of  dislocation  is  the  greater,  the  more  highly  "manufactured"  the 
article  is. 


56  BUSINESS  FORECASTING 

The  third  is  that  every  industry  depends  on  purchasing  power  obtained  from 
other  industries.  If  any  trade,  either  because  of  dislocation  of  supply  or 
change  of  demand,  goes  on  short  time,  the  loss  of  purchasing  power  on  the 
part  of  its  members  at  once  affects  the  shops,  and  to  that  extent  puts  the  shops, 
and  through  them  the  factories,  the  farms,  and  the  carrying  trade  which  fill 
the  shops,  on  short  time,  and  the  diminished  purchasing  power  of  such  shops, 
factories,  farms,  and  carrying  trades  in  turn  affects  other  industries,  and  so  on 
ad  infinitum. 

The  third,  and  to  some  extent  the  second,  of  these  explains  the  phenomena 
of  industrial  contagion,  and  contagion  explains  the  cyclical  movement.  That 
depression  breeds  depression  has  often  been  noticed,  and  is  easily  understood 
once  it  is  realised  that  "contagion"  is  more  than  a  mere  metaphor — the  virus 
is  diminished  purchasing  power  transmitted  from  pocket  to  pocket.  It  has  not 
been  so  much  noticed  that  in  industry  there  is  a  contagion  of  health  as  well 
as  a  contagion  of  disease.  When  the  depression  has  run  its  course,  and  the 
cycle  begins  the  upward  movement,  the  healthy  current  of  added  purchasing 
power  acts  in  precisely  the  same  way,  spreading  activity  through  the  shops  to 
the  farms,  the  factories,  and  the  carrying  trades.  The  only  thing  that  still 
remains  obscure  is  how  the  reaction  from  depression  begins.  As  a  rule,  it 
comes  so  gradually  that  the  beginnings  are  already  beyond  record  when  it  is 
ascertained  that  "trade  is  on  the  turn."  As  a  matter  of  theory,  an  abundant 
harvest — particularly  if  it  be  international — would  make  the  new  start,  for 
such  a  harvest  is  a  spontaneous  gift  of  heaven,  and  fills  the  farmers'  pockets 
with  new  purchasing  power. — "Economic  Annals  of  the  Nineteenth  Century," 
1801-1820,  William  Smart,  p.  607. 


Part  II 
THE  BAROMETERS  OF  BUSINESS 


57 


Chapter  V 

BAROMETERS  OF  AGRICULTURE 

The  barometers  of  production. — Productivity  may  be  ar- 
bitrarily divided  into  three  classes:  agricultural,  or  organic; 
industrial,  or  inorganic;  and  structural.  Agricultural  produc- 
tivity may  be  measured  in  terms  of  the  principal  crops:  corn, 
wheat,  and  cotton.  Industrial  productivity  may  be  gauged 
from  the  output  of  pig  iron  and  bituminous  coal,  the  unfilled 
orders  of  the  United  States  Steel  Corporation,  and  the  im- 
ports of  the  chief  raw  materials  used  in  production:  raw  silk, 
hides,  rubber,  wool,  fibres,  and  tin.  Structural  activity  may  be 
estimated  from  the  value  of  building  permits  issued  in  leading 
cities. 

Agricultural  production. — The  first  and  most  important 
class  of  production  is  agriculture.  Farm  production  affects 
the  purchasing  power  of  the  largest  single  body  of  workers  in 
the  country,  the  cost  of  the  principal  raw  materials  consumed  in 
manufacturing,1  and  the  earnings  of  many  important  railroad 
companies.  According  to  the  census  of  1910,  in  the  United 
States  12,659,203  persons  were  directly  engaged  in  agricul- 
ture, and  comprised  32.5  per  cent,  of  the  number  of  persons 
engaged  in  all  occupations.2  The  value  of  the  products  of  the 
farm  has  steadily  increased  from  approximately  $5,000,000,- 

*The  sources  of  materials  used  in  United  States  manufactures  in  1899,  1904, 
1909,  and  1914,  is  shown  in  the  following  tabulation  compiled  from  Table  No. 
138  in  the  "Statistical  Abstract  of  the  United  States  for  1920"  (in  millions  of 
dollars)  : 

Products  of  the  Farm:  1899  1904  1909  1914 

Food  and  kindred  products 1,780  2,300  3,190  3,830 

Textiles   900  1,250  1,750  2,000 

Leather  and  its  finished  products 400  480  670  750 

Liquors    nd  beverages 90  140  190  250 

Chemicals   and   allied   products 180  250  360  520 

Tobacco  manufactures 90  130  180  210 

Miscellaneous  industries  110  150  220  300 

Total    farm    products 3,550  4,700  6,560  7,860 

59 


60  BUSINESS  FORECASTING 

000  in  1900  to  about  $25,000,000,000  in  1919.  Prices  were 
abnormally  high  during  the  later  year,  however,  as  is  evidenced 
by  the  estimate  of  $20,000,000,000  for  1920.  These  totals 
include  both  crops  and  animal  products  in  the  average  propor- 
tion of  65  and  35  respectively.3 

The  cost  of  all  materials  used  in  manufacturing  in  the  United 
States  in  1914  was  $14,368,089,000.  Of  this  amount, 
$7,860,000,000  or  about  55  per  cent,  comprised  products  of 
the  farm.4  As  cost  of  material  is  an  important  element  in  pro- 
duction cost,  the  influence  of  agriculture  upon  industry  is 
plainly  discernible.5 

The  third  major  influence  of  agricultural  production  is  upon 
railroad  earnings.  Products  of  agriculture,  excluding  live 
stock,  contribute  one-tenth  of  the  revenue  freight  tonnage  of 

Products  of  the  Forest: 

Lumber  and  its  finished  products 480  520  720  760 

Paper  and  printing 210  310  450  580 

Vehicles  for  land  transportation 153  180  250  275 

Railroad  repair  shops 35  50  70  80 

Miscellaneous  industries   110  150  220  300 


Total  forest  products 988  1,210         1,710         1,995 

Products  of  the  Mine: 

Iron  and  steel  and  their  products 1,000  1,200  1,800  1,760 

Chemicals  and  allied  products 270  325  540  780 

Stone,  clay,  and  glass  products 85  120  180  240 

Metals,  other  than  iron  and  steel 470  630  890  1,020 

Vehicles  for  land  transportation ...  60  315 

Railroad  repair  shops 75  100  140  160 

Miscellaneous  industries  110  150  220  300 

Total   mine    products 2,010         2,525         3,830         4,610 

Grand  total    6,538         8,435        12,100        14,430 

Percentage  of  farm  products 54.1%        55.7%        54.2%       54.5% 

3  "Statistical  Abstract  of  the  United  States,"  1920,  p.  798. 
'  Monthly  Crop  Reporter,  January,  1921,  p.  3. 

4  "Statistical  Abstract  of  the  United  States,"  1920,  p.  193. 

"The  relationship  of  the  cost  of  materials  to  the  total  value  of  manufactured 
products  appears  to  be  the  subject  of  no  little  misapprehension.  In  "Business 
Cycles"  (p.  481),  Mitchell  states:  "According  to  the  preceding  table,  the  cost 
of  materials  exceeds  wages  in  every  one  of  the  leading  branches  of  manufac- 
ture, and  in  a  majority  of  cases  is  over  twice  as  large.  Indeed,  on  the  average 
it  makes  practically  two-thirds  of  the  total  outlay."  This  would  create  the  im- 
pression that  the  outlay  for  materials  is  greatly  in  excess  of  that  for  wages  and 
other  expenses  in  manufacturing — a  condition  which  is  true  in  many  individual 
industries  but  which  is  not  true  for  industry  as  a  whole  since  the  cost  of  ma- 


BAROMETERS  OF  AGRICULTURE  61 

the  American  railroads.  For  the  western  roads,  the  propor- 
tion is  nearer  one-fifth.6 

In  addition  to  the  direct  influence  of  agricultural  production 
upon  general  conditions,  an  even  greater  indirect  effect  is  de- 
rived. Increased  purchasing  power  of  agricultural  workers 
stimulates  industrial  production  to  meet  the  augmented  demand 
for  its  products.  Large  crops  require  greater  transportation 
facilities  and  encourage  the  carriers  to  place  orders  for  new 

terials  to  one  manufacturer  includes  wages  and  other  expenses  paid  at  a 
preceding  stage.  In  the  "Twelfth  Census  of  the  United  States,  Manufac- 
tures," Part  I,  p.  cxxv,  from  which  Mitchell  derives  his  table,  the  total  cost 
of  manufactures  was  reported  as  follows: 

Raw   materials    $2,389,000,000 

Semi-finished  materials 4,633,000,000 

Fuel,  freight,  etc 322,000,000 

Total  cost  of  materials  $7,345,000,000      66.2% 

* 

Salaries    $404,000,000 

Wages    2,322,000,000 

Total  salaries  and  wages   $2,726,000,000      24.5% 

Rent  of  works   $96,000,000 

Taxes    47,000,000 

Rent  of  office,  insurance,  etc 714,000,000 

Contract   work    171,000,000 

Total   miscellaneous    $1,028,000,000        9.3% 

Grand  total  cost $11,099,000,000    100.0% 

If  the  analysis  is  not  carried  further,  it  would  appear  that  the  cost  of  ma- 
terials consumes  66.2  per  cent  of  the  total  cost,  as  quoted  by  Mitchell.  But  the 
item  of  $4,633,000,000  listed  as  the  cost  of  semi-finished  materials  duplicates  a 
substantial  part  of  the  value  of  raw  materials,  labor,  and  other  expenses  shown 
in  the  tabulation.    A  revised  table  with  this  duplication  eliminated  is  appended: 

Raw  materials    $2,389,000,000  36.9% 

Fuel,  freight,  etc 322,000,000  4.9 

Salaries  and  wages   2,726,000,000  42.1 

Miscellaneous    1,028,000,000  16.1 

Net  cost $6,465,000,000    100.0% 

The  net  cost  of  materials  therefore  comprised  but  36.9  per  cent  of  the  net 
manufacturing  cost  rather  than  66.2  per  cent.  The  foregoing  figures  apply  to 
the  manufacturing  year  1899.  Unfortunately  later  figures  are  not  available 
but  there  is  reason  to  believe  that  substantially  the  same  results  would  be  ob- 
tainable from  an  analysis  of  manufacturing  costs  in  1910  and  1920. 

•"Statistics  of  Railways  in  the  United  States,"  1918,  p.  39. 


62  BUSINESS  FORECASTING 

equipment  which  find  reflection  in  purchases  of  iron  and  steel 
products.  Directly  and  indirectly,  the  volume  of  agricultural 
production  tends  to  dominate  commercial  activity.  Other 
forms  of  industrial  effort  are  regulated  largely  in  accordance 
with  the  harvests.7 

Government  crop  reports. — Current  agricultural  produc- 
tivity can  be  most  satisfactorily  measured  from  the  monthly 
reports  of  the  Bureau  of  Crop  Estimates  of  the  Department 
of  Agriculture.  Domestic  production  only  is  estimated,  but 
estimates  of  foreign  crops  are  reported  as  compiled  abroad. 

The  crop  reports  are  issued  during  the  growing  season. 
The  first  report  gives  the  acreage  planted  and  the  last  report 
the  estimated  production;  the  intermediate  reports  give  the 
condition  of  the  crop  from  month  to  month.  Condition  is  re- 
ported as  a  certain  percentage  of  a  "normal."  For  instance,  on 
May  9,  1921,  the  condition  of  winter  wheat  in  the  United 
States  was  estimated  at  88.8  per  cent,  of  "normal."  The  term 
"normal"  is  likely  to  be  confusing  unless  properly  understood. 
It  is  not  the  maximum  productivity  obtainable,  nor  is  it  the 
average  for  a  preceding  series  of  years.  It  is  what  the  yield 
may  reasonably  be  expected  to  be  if  the  growing  season  is 
favorable  which  means  not  unusually  good  nor  unusually  bad.8 

While  the  Department  forecasts  the  yield  upon  the  basis 
of  normal  growing  conditions  up  to  the  time  of  harvest,  no 
attempt  is  made  to  predetermine  actual  conditions  which  will 
naturally  cause  the  yield  to  be  greater  or  less  than  anticipated. 

7  "Crops  affect  business  by:  (1)  directly  determining  the  ability  of  the  farmer 
to  buy  factory  products,  his  annual  purchasing  power  through  crops  amounting 
to  about  $9,000,000,000;  (2)  by  indirectly  determining  the  amount  of  merchan- 
dise which  persons  employed  in  manufacturing  and  mercantile  lines  and  all 
other  non-agricultural  pursuits  can  purchase,  for  if  they  must  pay  high  prices 
for  food  there  will  be  less  to  spend  for  merchandise,  and  vice  versa;  (3)  by 
determining  the  earnings  of  the  railroads,  for  railroad  traffic  largely  consists 
in  hauling  farm  products  or  merchandise  to  be  exchanged  for  farm  products, 
and  since  the  crops  largely  determine  the  ability  of  the  railroads  to  buy  new 
equipment  and  make  improvements,  it  follows  that  crops  thus  indirectly  deter- 
mine the  degree  of  prosperity  in  the  iron  and  steel  business,  which  is  the  basic 
industry  of  the  country.  Thus  it  is  evident  that  activity  in  transportation,  iron 
and  steel,  hardware,  textiles  and  all  other  lines  of  business  finds  its  stimulative 
source — its  fountain-head — in  the  agricultural  harvests  of  the  country.  Pros- 
perity fundamentally  depends  upon  the  condition  of  the  soil,  and  the  business 
men  of  this  country  always  adjust  their  commercial  commitments  to  the  pros- 
pects of  the  harvests  to  a  greater  extent  than  to  any  other  one  factor." — 
"Financial  Forecasting,"  by  James  H.  Brookmire,  in  Moody's  Magazine,  July. 
1913,  p.  19. 

8  "It  is  neither  a  maximum  possible  or  even  a  bumper  crop,  which  occurs  only 
at  rare  intervals  when  conditions  are  exceedingly  favorable,  nor  a  medium  or 


BAROMETERS  OF  AGRICULTURE  63 

Dates  of  issuance. — The  monthly  estimates  of  the  Depart- 
ment of  Agriculture  are  usually  issued  between  the  seventh 
and  tenth  day  of  each  month  and  give  the  condition  of  the 
various  crops  as  of  the  first  of  the  month.  An  exception  is 
made  in  the  case  of  cotton,  on  which  the  report  is  issued  on 
the  first  of  the  month  and  gives  the  condition  as  of  the  twenty- 
fifth  of  the  preceding  month. 

Reports  on  the  condition  of  the  crops  begin  in  April  when 
the  condition  of  winter  wheat  and  rye  is  given.  The  May  re- 
port likewise  gives  the  condition  of  winter  wheat  and  rye,  and 
the  acreage  originally  planted  to  winter  wheat  which  has  been 
abandoned.  The  June  report  covers  the  acreage  planted  to 
spring  wheat  and  oats;  and  the  condition  of  wheat,  oats,  bar- 
ley, rye,  clover,  spring  pastures,  apples,  peaches  and  rice.  The 
July  report  gives  the  acreage  planted  to  corn,  potatoes,  tobacco 
and  sugar  cane;  and  the  condition  of  the  principal  crops.  The 
August  report  gives  the  yield  of  winter  wheat;  and  the  condi- 
tion of  the  other  crops.  The  September  report  gives  the  con- 
dition at  harvest  time  of  spring  wheat,  oats,  barley  and  rye; 
as  well  as  the  condition  of  the  other  crops.  The  October  re- 
port gives  the  yield  of  spring  wheat,  barley,  oats,  and  rye;  and 
the  condition  of  corn,  potatoes,  sugar  cane,  tobacco,  and  rice. 
The  November  report  gives  the  yield  of  corn,  potatoes,  hay, 
tobacco  and  rice.  The  December  report  gives  the  production 
and  farm  prices  of  the  principal  crops;  the  acreage  sown  to 
winter  wheat  and  rye  for  the  following  year;  and  the  con- 
dition of  winter  wheat  and  rye. 

Agricultural  production:  Corn.— Corn  is  the  most  valu- 
able agricultural  product  in  the  United  States.  The  average 
pre-war  world  production  of  corn  from  1909  to  1913  inclusive 
was   3,881,263,000    bushels   of   which    this    country   supplied 


small  crop  grown  upon  one  or  more  adverse  conditions.  Neither  is  it  an  average 
crop,  which  rarely  occurs  because  of  the  effect  on  the  average  of  extremely  low 
or  extremely  high  yields  in  exceptional  seasons.  It  is  rather  the  typical  crop 
represented  by  the  average  of  a  series  of  good  crops,  leaving  out  of  considera- 
tion altogether  the  occasional  bumper  crop  and  the  more  or  less  frequent  partial 
crop  failure.  This  expected  yield  at  planting  time,  the  full  crop  that  the  farmer 
has  in  mind  when  he  thinks  of  the  yield  he  expects  to  harvest,  or  the  typical 
crop  represented  by  the  average  of  good  crops  only,  is  the  "normal,"  or  standard 
adopted  by  this  bureau  for  expressing  condition  during  the  growing  season  and 
yield  at  harvest  time." — "Government  Crop  Reports,"  Circular  17,  Revised, 
p.  20. 


64  BUSINESS  FORECASTING 

2,708,334,000  bushels.9  The  chief  value  of  corn  is  as  fodder 
for  livestock,  and  for  this  reason,  practically  the  entire  crop 
is  consumed  where  it  is  grown,  as  only  20  per  cent  moves 
out  of  the  producing  counties. 

TABLE  No.  9.— CORN:    CONDITION  OF  CROP,  UNITED  STATES,  ON 
FIRST  OF  MONTHS  NAMED,  1900-1921* 

Year  July  August  September  October 

Per  cent  Per  cent  Per  cent  Per  cent 

1900 89.5  87.5  80.6  78.2 

1901  81.3  54.0  51.7  52.1 

1902 87.5  86.5  84.3  79.6 

1903 79.4  78.7  80.1  80.8 

1904    86.4  87.3  84.6  83.9 

1905  87.3  89.0  89.5  89.2 

1906 87.5  88.0  90.2  90.1 

1907  80.2  82.8  80.2  78.0 

1908   82.8  82.5  79.4  77.8 

1909 89.3  84.4  74.6  73.8 

1910 85.4  79.3  78.2  80.3 

1911     80.1  69.6  70.3  70.4 

1912 81.5  80.0  82.1  82.2 

1913 86.9  75.8  65.1  65.3 

1914 85.8  74.8  71.7  72.9 

1915  81.2  79.5  78.8  79.7 

1916 82.0  75.3  71.3  71.5 

1917  81.1  78.8  76.7  75.9 

1918  87.1  78.5  67.4  68.6 

1919  86.7  81.7  80.0  81.3 

1920 84.6  86.7  86.4  89.1 

1921  91.1  84.3  85.1  84.8 

*  From  "Yearbook  of  the  Department  of  Agriculture,"  1920,  Separate  No.  861, 
p.  11. 

Government  statistics  on  corn  production  are  included  in  the 
reports  for  the  following  months  and  contain  the  information 
stated: 

July — Acreage,  condition. 

August — Condition. 

September — Condition. 

October — Condition. 

November — Production  (preliminary) . 

December — Production,  acreage,  value  (final). 

The  condition  of  the  corn  crop  on  the  first  of  the  months 
named  in  the  period  1900-1921  was  reported  by  Che  Depart- 
ment of  Agriculture  as  shown  in  Table  No.  9. 

8  "Yearbook  of  the  Department  of  Agriculture,"  1920.     Separate  No.  861,  p.  4. 


BAROMETERS  OF  AGRICULTURE 


65 


66  BUSINESS  FORECASTING 

For  the  eleven  year  period  from  1909  to  1919,  the  extent 
and  causes  of  yearly  corn  crop  losses  averaged  as  follows : 


TABLE  No.  10.— EXTENT  AND  CAUSES  OF  YEARLY  CORN  CROP  LOSS 
DURING  THE  PERIOD  FROM  1909  TO  1919* 

Per  cent  Per  cent 

Deficient  moisture 16.3          Plant  disease   0.2 

Excessive  moisture   4.0          Insect   pests    2.7 

Floods 0.9          Animal  pests 0.2 

Frost  or  freeze 2.9          Defective  seed   0.7 

Hail 0.4                                                                    

Hot  winds 2.2              Grand  total  31.0 

Storms 0.5 

Total  climatic   27.2 

*  From    "Yearbook  of  the  Department  of  Agriculture,"     1920,   Separate  No. 
861,  p.  12. 

The  corn  crop  of  the  United  States  is  harvested  chiefly  dur- 
ing September,  October,  and  November.  Almost  one-half  of 
the  crop  is  harvested  in  November.  The  percentage  harvested 
in  each  month  is  shown  in  Table  No.  11. 


TABLE  No.  11.— PERCENTAGE  OF  THE  CORN  CROP  OF  THE 
UNITED  STATES  HARVESTED  MONTHLY* 

Per  cent 

June 0.1 

July    0.1 

August  1.5 

September     15.8 

October    28.3 

November   43.3 

December   10.9 

Total    100.0 

*  "Yearbook  of  the  Department  of  Agriculture,"  1919,  p.  727. 

The  production,  acreage,  and  value  of  the  corn  crop  of  the 
United  States  for  the  period  from  1900  to  1920  inclusive  is 
stated  in  Table  No.  12. 

Agricultural  production :  Wheat. — The  United  States  pro- 
duces about  25  per  cent  of  the  total  world  production  of 
wheat.  The  average  yearly  pre-war  production  from  1909  to 
1913  inclusive  was  3,573,947,000  bushels  of  which  this 
country  contributed  686,961,000.  The  important  wheat- 
growing  countries  of  the  world,  based  upon  production  and 


BAROMETERS  OF  AGRICULTURE 


67 


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COiHOOON   * 
■^  no  "■+'  nO  no 

O-    CO  J^~   NO    "*   O- 

in  go  oi  co  co  NO 

Produc- 
tion 
{000 

omitted). 

Bushels. 
2,105,103 
1,522,520 
2,523,648 
2,244,177 
2,467,481 

■*  no  O  — i  O 
On  •— i  (v|  in  on 
ON  rf  co  no  — < 
oT  o."  of  co"  oi 
O  r~l  On  no  in 

of  of  of  of  oi 

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co  t^  co  in  ON  o- 

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-*f  NO  in  of  co"  of 
ON  no  NO  O  in  co 
On  in  o  in  co  oi 
Ol   Ol  CO   oi   of  CO 

k 

v> 

Co 

age 

yield 

per 

acre. 

-?  tn  Noo  m  oo 

co  co  ON  o>  On 

NO\N-i   QO 

Ol  ■*  CO  O  NO  ON 

S  in  NO  NO  in  NO 
Oq   (N  in   (S4  (N  N 

co  O  in  no  in 
CMmMNCN 

t-^  co  On  co  in 

Ol    Ol   Ol    Ol   Ol 

CO   -*+!    vO   -+1    CO   O 
Ol    Ol   Ol    Ol    Ol   CO 

Acreage 

{000 
omitted) 

i— i  O  -*  oi  ol 
oj  oi  in  ">f  On  co 

iinnOON 

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■*"  \d  ctC  -H  oo" 

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in  in  co  O  «n 

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o  o  o  o  o 

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ON  ON  co  NO  o»  O 
iH   (NN   ■*   O  SO 

so"  m*  so"  •*  o"  ■*" 
O  O  — <  O  O  O 

k* 

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in  NO  o-  co  ON 

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< 


68 


BUSINESS  FORECASTING 


— =r  -* 


BAROMETERS  OF  AGRICULTURE 


69 


volume  of  exports,  for  the  pre-war  period  1909-1913  were  as 
follows : 

TABLE  No.  13.— PRODUCTION  AND  EXPORTATION  OF  WHEAT, 

1909-1913* 

Average  Average 

Country                                                   production  exports 

United  States   686,691,000  100,310,000 

Russia  proper 522,794,000  161,766,000 

British  India   350,736,000  51,510,000 

France    317,254,000  

Canada    197,119,000  90,871,000 

Italy    183,260,000  

Argentina    157,347,000  95,243,000 

Hungary   proper    156,523,000  

Germany    152,119,000  21,149,000 

Spain     130,446,000  

Australia   84,943,000  49,732,000 

♦Compiled   from   "Yearbook  of  the  Department  of  Agriculture,"   1920,   Sep- 
arate No.  861,  pp.  16-32. 

Government  reports  on  wheat. — Government  reports  on 

wheat   production    are    issued   in   the    following  months    and 
contain  the  information  stated: 


Month 
April   ... 


May 


June  . . 

July   .. 
August 


September 
October   . . 


December 


Winter  wheat 
Condition 

Condition 

Acreage  abandoned 

Condition 

Condition 

Production 
Quality 


(Old  crop) 
Final  estimate: 
acreage 
production 
value 
(New  crop) 
Acreage  planted 
Condition 


Spring  ivheat 


Acreage  planted 
Condition 

Condition 

Condition 

Condition 
Production 

Quality 

Final  estimate: 
acreage 
production 
value 


The  wheat  harvest  in  the  countries  of  the  northern  hemi- 
sphere   occurs    between    May    and    September    while    in    the 


70 


BUSINESS  FORECASTING 


southern  hemisphere — notably  Argentina  and  Australia — the 
harvest  months  are  from  January  to  March.  The  British 
India  crop  is  harvested  in  March.  Yet  wheat  production  is 
so  widespread  that  the  crop  is  being  harvested  in  each  of 
the  twelve  months  in  some  part  of  the  world.  In  the  United 
States,  the  harvest  begins  in  May  in  southern  Texas  and  then 
advances  north  until  it  finally  closes  in  the  Dakotas  in 
October. 

The  condition  of  the  wheat  crop  on  the  first  of  the  months 
named  in  the  period  1900-1920  was  reported  by  the  Depart- 
ment of  Agriculture  as  shown  in  Table  No.  14. 

TABLE  No.  14.— WINTER  AND  SPRING  WHEAT:    CONDITION  OF 
CROP,  UNITED  STATES,  ON  FIRST  OF  MONTHS  NAMED, 

1900-1920* 


Winter  Wheat. 

Spring  Wheat. 

Year. 

De- 
cember 
of  pre- 
vious 
year. 

April. 

May. 

June. 

When 
har- 
vested. 

June. 

July. 

.Aug. 

When 
har- 
vested. 

1900 

P.ct. 
97 .1 
97.1 
86.7 
99.7 
86.6 

82.9 
94.1 
94.1 
91.1 

85.3 

95.8 
82.5 
86.6 
93.2 
97.2 

88.3 
87.7 
85.7 
79.3 

98.6 
85.2 
87.9 

P.ct. 
82.1 
91.7 
78.7 
97.3 
76.5 

91.6 
89.1 
89.9 
91.3 
82.2 

80.8 
83.3 
80.6 
91.6 
95.6 

88.8 
78.3 
63.4 
78.6 

99.8 
75.6 
91.0 

P.ct. 
88.9 
94.1 
76.4 
92.6 
76.5 

92.5 
90.9 
82.9 
89.0 
83.5 

82.1 
86.1 
79.7 
91.9 
95.9 

92.9 

82.4 
73.2 
86.4 

100.5 
79.1 

88.8 

P.ct. 
82.7 
87.8 
76.1 
82.2 
77.7 

85.5 
82.7 
77.4 
86.0 
80.7 

80.0 
80.4 
74.3 
83.5 
92.7 

85.8 
73.2 
70.9 
83.8 

94.9 

78.2 
77.9 

P.ct. 
80.8 
88.3 
77.0 
78.8 
78.7 

82.7 
85.6 
78.3 
80.6 
82.4 

81.5 
76.8 
73.3 
81.6 
94.1 

84.4 
75.7 
75.9 
79.5 

89.0 
79.7 

77.2 

P.ct. 
87.3 
92.0 
95.4 
95.9 
93.4 

93.7 
93.4 
88.7 
95.0 
95.2 

92.8 
94.6 
95.8 
93.5 
95.5 

94.9 

88.2 
91.6 
95.2 

91.2 

89.1 
93.4 

P.ct. 

55.2 
95.6 
92.4 
82.5 
93.7 

91.0 

91.4 
87.2 
89.4 
92.7 

61.6 

73.8 
89.3 
73.8 
92.1 

93.3 
89.0 
83.6 
86.1 

80.9 

88.0 
80.8 

P.   ct. 
56.4 
80.3 
89.7 
77.1 
87.5 

89.2 
86.9 
79.4 
80.7 
91.6 

61.0 

59.8 
90.4 
74.1 

75.5 

93.4 

63.4 
68.7 
79.6 

53.9 
73.4 
66.6 

P.ct. 

56.1 

1901 

78.4 

1902 

87.2 

1903 

78.1 

1904... 

66.2 

1905 

87.3 

1906 

83.4 

1907 

77.1 

1908 

77.6 

1909 

88.6 

1910 

63.1 

1911 

56.7 

1912 

90.8 

1913 

75.3 

1914 

68.0 

1915 

94.6 

1916 

48.6 

1917 

71.2 

1918 

82.1 

1919 

48.5 

1920 

64.1 

1921 

62.5 

"Yearbook  of  the  Department  of  Agriculture,"  1920,  Separate  No.  861,  p.  25. 


BAROMETERS  OF  AGRICULTURE  71 

For  the  eleven-year  period,  1909-1919,  the  extent  and  causes 
of  the  yearly  wheat  crop  losses  averaged  as  follows : 

TABLE   No.    IS.— EXTENT  AND    CAUSES   OF   YEARLY   WHEAT   CROP 
LOSS  DURING  THE  PERIOD  FROM  1909  TO  1919* 

Per  cent  Per  cent 

Deficient  moisture 12.4  Plant  diseases    2.7 

Excessive  moisture  2.0  Insect  pests 2.1 

Floods 0.3  Animal   pests    0.2 

Frost  or  freeze 4.5  Defective  seed  0.2 

Hail    1.1  

Hot  winds 2.0  Grand  total    27.8 

Storms    0.3 

Total  climatic   22.6 

*  From    "Yearbook  of  the  Department  of  Agriculture,"    1920,   Separate   No. 
861,  p.  26. 

The  wheat  crop  of  the  United  States  is  harvested  between 
May  and  October.  More  than  90  per  cent  is  harvested  dur- 
ing the  months  of  June,  July  and  August  as  is  shown  in 
Table  No.  16. 

TABLE  No.  16.— PERCENTAGE  OF  THE  WHEAT  CROP  OF  THE 

UNITED  STATES  HARVESTED  MONTHLY*  D 

Per  cent 

May   0.5 

June   22.0 

July 42.3 

August  28.4 

September   6.5 

October    0.3 

Total   100.0 

•"Yearbook  of  the  Department  of  Agriculture,"  1919,  p.  727. 

The  production  of  winter  wheat  averages  about  twice  that 
of  spring  wheat.  Incidentally  the  quality  of  winter  wheat  is 
superior.  Table  No.  17  shows  the  relative  production  during 
the  period  from  1910  to  1920: 

TABLE  No.   17.— RELATIVE  PRODUCTION  OF  SPRING  AND   WINTER 

WHEAT,  1910-1920* 

Year  Winter  wheat  Spring  wheat 

1920 577,763,000  209,365,000 

1919     729,503,000  204,762,000 

1918   565,099,000  356,339,000 

1917   412,901,000  223,754,000 

1916   480,553,000  155,765,000 

1915   673,947,000  351,854,000 

1914    684,990,000  206,027,000 

1913   | 523,561,000  239,819,000 

1912 399,919,000  330,348,000 

1911     430,656,000  190,682,000 

1910     434,142,000  200,979,000 

•"Yearbook  of  the  Department  of  Agriculture,"  1920,  Separate  No.  861,  p.  21. 


72 


BUSINESS  FORECASTING 


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cn  cm  O  ^^  cn 
cm  cn  cm  cn  cm 

Imports 

including 

flour,  fiscal 

year 

beginning 

July  1. 

Bushels. 
603,101 
120,502 

1,080,128 
217,682 

3,286,189 

OO  M  wi  O  N 
OONOO'tH 
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7,187,650 
24,924,985 
31,215,213 
11,288,591 

5,495,516 

Domestic 

exports 

including 

flour,  fiscal 

year 

beginning 

July  1. 

Bushels. 
215,990,073 
234,772,516 
202,905,598 
120,727,613 

44,112,910 

97,609,007 
146,700,425 
163,043,669 
114,268,468 

87,364,318 

69,311,760 

79,689,404 

142,879,596 

145,590,349 

332,464,975 

243,117,026 
203,573,928 
132,578,633 
287,401,579 
219,861,398 

Chicago  cash  price  per 

bushel,  No.  1  northern 

Spring 

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•-I   •— I   CM   CM   CM   i— i 

Farm 

value 

Dec.  1  {000 

omitted). 

.  in  O  if  "i  O 

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t~  m  cn  cm  O  ^ 
^  cT  t-»*  cm  cn  o 

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942,303 
1,019,968 
1,278,112 
1,881,826 
2,009,407 
1,135,806 

Aver- 
age 

farm 

price 
per 

bushel 
Dec.  1. 

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cn  •*  O  On  no 

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BAROMETERS  OF  AGRICULTURE  73 

The  production,  acreage,  and  value  of  the  wheat  crop 
of  the  United  States  for  the  period  from  1900  to  1920  in- 
clusive is  stated  in  Table  No.  18. 

The  per  capita  consumption  of  wheat  in  the  United  States 
averages  from  5.5  to  6  bushels  annually  which  makes  a  total 
of  about  575,000,000  bushels  required  yearly  for  domestic 
food  purposes.  To  this  must  be  added  about  75,000,000 
bushels  for  seeding.  This  gives  the  total  domestic  consump- 
tion of  about  650,000,000  bushels  yearly.  The  surplus  yield 
over  and  above  this  quantity  is  the  amount  which  is  available 
for  export. 

Agricultural  production:  Cotton. — The  United  States 
produces  about  60  per  cent  of  the  world  production  of  cotton. 
The  average  pre-war  production  from  1909  to  1913  inclu- 
sive was.  21,143,482  bales  of  which  this  country  contributed 
13,033,137  bales.  The  important  cotton-growing  countries 
of  the  world,  based  upon  production  and  volume  of  exports, 
for  the  pre-war  period  1909-1913  were  as  follows: 


TABLE  No.  19.— PRODUCTION  AND  EXPORTATION  OF  COTTON, 

1909-1913* 

(in  bales  of  478  pounds  net ) 

Average  Average 

annual  annual 

Country  production  exports 

United  States   13,033,137  9,008,000 

British   India    3,511,684  1,966,000 

Egypt    1,451,621  1,442,000 

*  "Yearbook    of    the    Department    of   Agriculture,"    1920,    Separate    No.    862, 
p.  28-34. 

Government  reports  on  cotton. — Government  reports  on 
cotton  production  are  issued  in  the  following  months  and 
contain  the  information  stated: 

June — Condition. 

July — Acreage  planted  and  condition. 

August — Condition. 

September — Condition. 

October — Condition. 

December — Acreage,  production,  and  value. 

The  condition  of  the  cotton  crop  as  of  the  twenty-fifth  of 
the  month  was  reported  by  the  Department  of  Agriculture 
in  the  period  1899-1920  as  shown  in  Table  No.  20. 


74 


BUSINESS  FORECASTING 


BAROMETERS  OF  AGRICULTURE            75 

TABLE  No.  20.— COTTON:   CONDITION  OF  CROP,  UNITED  STATES, 
MONTHLY,  1899-1920* 

Year                                    May  25      June  25      July  25  Aug.  25  Sept.  25 

1899  85.7  87.8  84.0  68.5  62.4 

1900  82.5  75.8  76.0  68.2  67.0 

1901  81.5  81.1  77.2  71.4  61.4 

1902  95.1  84.7  81.9  64.0  58.3 

1903  74.1  77.1  79.7  81.2  65.1 

1904  83.0  88.0  91.6  84.1  75.8 

1905 77.2  77.0  74.9  72.1  71.2 

1906  84.6  83.3  82.9  77.3  71.6 

1907  70.5  72.0  75.0  72.7  67.7 

1908  79.7  81.2  83.0  76.1  69.7 

1909  81.1  74.6  71.9  63.7  58.5 

1910  82.0  80.7  75.5  72.1  65.9 

1911  87.8  88.2  89.1  73.2  71.1 

1912  78.9  80.4  76.5  74.8  69.6 

1913  79.1  81.8  79.6  68.2  64.1 

1914  74.3  79.6  76.4  78.0  73.5 

1915  80.0  80.2  75.4  69.2  60.8 

1916  77.5  81.1  72.3  61.2  56.3 

1917  69.5  70.3  70.3  67.8  60.4 

1918  82.3  85.8  73.6  55.7  54.4 

1919  75.6  70.0  67.1  61.4  54.4 

1920  62.4  70.7  74.1  67.5  59.1 

1921  66.0  69.2  64.7  49.3  42.2 

•"Yearbook  of  the  Department  of  Agriculture,"  1920,  Separate  No.  862,  p.  31. 


For  the  eleven-year  period,  1909-1919,  the  extent  and 
causes  of  the  yearly  cotton  crop  losses  averaged  as  follows : 

TABLE  No.  21.— EXTENT  AND  CAUSES  OF  YEARLY  COTTON  CROP 
LOSS  DURING  THE  PERIOD  FROM  1909  TO  1919* 

Per  cent  Per  cent 

Deficient  moisture 12.3  Plant  disease   2.0 

Excessive  moisture 4.3  Insect  pests  9.7 

Floods 1.0  Animal  pests 0.0 

Frost  or  freeze   1.4  Defective  seed   0.2 

Hail 0.5  

Hot  winds 1.6  Grand  total 33.7 

Storms 0.7 

Total  climatic 21.8 

*  From   "Yearbook   of   the   Department  of   Agriculture,"    1920,   Separate   No. 
862,  p.  31. 

The  cotton  crop  of  the  United  States  is  picked  principally 
during  the  months  of  September  and  October  as  is  shown 
in  Table  No.  22. 


76  BUSINESS  FORECASTING 

TABLE  No.  22.— PERCENTAGE  OF  THE  COTTON  CROP  OF  THE 
UNITED  STATES  HARVESTED  MONTHLY* 

Per  cent 

July   1.4 

August  11.5 

September   31.6 

October 34.4 

November   16.0 

December    4.7 

January-April    0.4 

Total   100.0 

♦"Yearbook  of  the  Department  of  Agriculture,"  1919,  p.  728. 

The  production,  acreage,  and  value  of  the  cotton  crop  of 
the  United  States  for  the  period  from  1900  to  1920  inclusive 
is  stated  in  Table  No.  23. 

Agricultural  production  according  to  States. — The  value 
of  all  farm  crops  of  the  United  States  according  to  States  is 
shown  in  Table  No.  24.  Although  the  ranking  varies  some- 
what from  year  to  year,  the  table  indicates  fairly  well  the  rela- 
tive importance  of  the  crops  in  influencing  business  conditions  in 
the  respective  States. 

Relation  of  acreage  to  agricultural  production. — The  acre- 
age planted  to  the  various  crops  does  not  change  materially 
from  year  to  year,  except  for  a  gradual  increase  of  about  3  per 
cent  annually  to  keep  pace  with  the  growth  of  the  country.  The 
acreage  planted  does  not  determine  the  size  of  the  crop  as 
climatic  conditions  during  the  growing  season  are  the  gov- 
erning factor.     This  was  illustrated  in   1916  and  1917.     In 

1916,  a  crop  of  480,553,000  bushels  of  winter  wheat  was 
secured  from  an  original  acreage  of  39,203,000;  whereas  in 

1917,  an  original  acreage  of  40,534,000  yielded  but  412,- 
901,000  bushels.  In  1912,  33,215,000  acres  originally 
planted  yielded  399,919,000  bushels  of  winter  wheat;  and 
in  the  following  year,  1913,  practically  the  same  acreage, 
33,618,000,  yielded  523,561,000  bushels. 

The  relative  stability  of  agricultural  production  irrespec- 
tive of  business  conditions  may  likewise  be  illustrated.  On 
December  1,  1898,  the  average  market  price  of  wheat  was 
85.1  cents  per  bushel  and  at  that  time  27,642,000  acres 
were  planted  to  winter  wheat  for  the  following  year.  One 
year  later,  the  market  price  had  dropped  to  62.2  cents,  yet 
29,954,000  acres  were  planted.  The  acreage  planted  in 
1903,   1904,   1905,   1906,  and  1907,  remained  stationary  at 


BAROMETERS  OF  AGRICULTURE 


77 


78 


BUSINESS  FORECASTING 


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BAROMETERS  OF  AGRICULTURE 


79 


TABLE  No. 


14.— VALUE  OF  THE  UNITED  STATES  FARM  CROPS 
ACCORDING  TO  STATES  FOR  1920* 


Value 


Rank         States 

1 .  . .  .Texas $727,400,000 

2 Iowa    459,191,000 

3.... Illinois    459,179,000 

4 California    457,750,000 

5 . . . . New  York 456,507,000 

6 North  Carolina  ..  412,374,000 

7 Pennsylvania  ....  397,617,000 

8 Kansas    378,436,000 

9.... Ohio 369,869,000 

10 Wisconsin 360,270,000 

11 Missouri   343,012,000 

12 Georgia 323,290,000 

13.... Nebraska    306,469,000 

14 Michigan    303,410,000 

15 Indiana  299,751,000 

16 Oklahoma 294,715,000 

17 Minnesota 288,270,000 

18 South  Carolina  ..  282,613,000 

19 Kentucky    268,857,000 

20 Arkansas 248,275,000 

21 Tennessee 243,048,000 

22 Alabama 240,001,000 

23 Virginia    239,792,000 

24 Mississippi   226,182,000 


Ra?ik         States 

25.  .  .  .North  Dakota   . .. 

26.  .  .  .South  Dakota   . . . 

27.  . .  .Louisiana    

28 Washington    

29 Colorado    , 

30.... West  Virginia  ... 

31 . . .  .Oregon    

32 Maryland   

33  . . .  .New  Jersey 

34. ...Idaho 

35 Florida    

36. . .  .Maine    

37 Montana     

38. ..  .Massachusetts  .. 

39 Vermont   

40.... New  Mexico   ... 
41 .  .  .  .Connecticut    .... 

42 ... .  Wyoming  

43  .  . .  .Arizona    

44 Utah    

45.... New   Hampshire. 

46.  .  .  .Delaware    

47. . .  .Nevada    

48 Rhode   Island    . . 


Value 

5196,171,000 

191,401,000 

176,706,000 

150,579,000 

149,687,000 

112,485,000 

110,115,000 

107,847,000 

97,990,000 

92,275,000 

86,503,000 

84,688,000 

78,042,000 

71,088,000 

59,210,000 

53,626,000 

53,590,000 

51,584,000 

45,353,000 

43,129,000 

30,098,000 

20,630,000 

13,244,000 

6,336,000 


*  From  Journal  of  Commerce,  New  York,  January  17,  1921. 


31,000,000  although  the  market  price  on  December  1  in  the 
respective  years  was  71.6  cents,  97.8  cents,  78.2  cents,  68.3 
cents,  and  88.2  cents.  This  tendency  does  not  always  hold 
good  however.  A  market  price  of  98.6  cents  on  December  1, 
1914,  encouraged  the  planting  of  42,881,000  acres;  and  the 
following  year  disappointment  in  the  prevailing  price  of  94.7 
cents  caused  the  acreage  planted  to  drop  to  39,203,000. 

Although  the  preceding  illustrations  have  been  confined  to 
winter  wheat,  the  same  tendencies  hold  good  for  the  other 
crops  generally.  Agricultural  production  is  not  wholly  in- 
dependent of  business  conditions,  but  in  the  main  is  conducted 
without  any  large  degree  of  influence  from  the  commercial 
world.10 

Analysis  of  Federal  crop  reports. — A  study  of  the  monthly 
crop  estimates  as  shown  in  the  preceding  tables  indicates  that 
August  is  usually  the  critical  month  during  the  growing  season. 
This  is  not  invariably  so,  however,  as  was  illustrated  in  1901 

"The  figures  used  in  the  illustrations  given  are  taken  from  the  "Yearbook  of 
the  Department  of  Agriculture,"  1920,  Separate  No.  861,  p.  21. 


80  BUSINESS  FORECASTING 

when  the  condition  of  the  corn  crop  declined  from  81.3  to 
54.0  per  cent  during  July.  Rarely  does  the  crop  improve 
from  the  first  estimate;  the  amount  of  deterioration  varies 
with  the  different  crops.  Average  figures  are  of  academic 
interest  only  in  connection  with  crop  estimates  as  they  repre- 
sent a  hypothetical  condition  which  is  never  realized — this 
is  why  the   "normal"    is  not  figured  on  an  average  basis. 

Federal  estimates  of  the  corn  crop  cannot  be  safely  accepted 
as  indicative  of  the  actual  yield  until  the  September  report 
is  issued.  The  winter  wheat  crop — and  therefore  the  total 
wheat  crop — depends  chiefly  upon  the  manner  in  which  the 
crop  comes  through  the  winter.  The  April  report  often 
differs  widely  from  that  of  the  preceding  December,  but 
foretells  with  great  accuracy  the  coming  harvest.  The  first 
report  on  spring  wheat — in  June — is  unusually  deceptive  as 
the  actual  harvest  is  invariably  much  less.  The  early  fore- 
casts on  cotton  are  seldom  reliable  unless  generous  allowance 
is  made  for  deterioration  which  is  certain  to  come.  August 
is  the  critical  month. 

Climatic  conditions  comprise  the  principal  cause  for  the 
yearly  crop  losses.  Deficient  moisture  is  responsible  for  50 
per  cent  of  the  corn  loss,  for  40  per  cent  of  the  wheat  loss, 
and  for  30  per  cent  of  the  cotton  loss.  Excessive  moisture 
seldom  affects  the  crops.  Frost  is  of  principal  danger  to  the 
wheat  crop  and  has  proven  as  detrimental  to  that  grain  as 
plant  disease  and  insect  pests  combined.  Cotton  is  subject 
to  particular  ravage  from  insects  which  accounts  for  more 
than  25  per  cent  of  the  loss  annually.  Plant  disease  causes 
10  per  cent  of  the  annnal  loss  in  the  wheat  crop,  but  only 
6  per  cent  in  the  case  of  cotton,  and  scarcely  affects  corn. 

Agricultural  production  as  a  business  barometer. — Agri- 
cultural productivity  is  the  most  important  single  factor  which 
has  influence  over  the  trend  of  business  conditions.  Agri- 
culture supplies  more  than  50  per  cent  (on  a  value  basis) 
of  the  raw  materials  used  in  manufacturing,  gives  employ- 
ment to  more  workers  than  any  other  single  industry,  and 
exerts  marked  influence  upon  railroad  earnings.  The  inadapt- 
ability of  agricultural  production  to  regulation  in  accordance 
with  changing  business  conditions,  and  the  impossibility  of 
predetermining  the  harvests  because  of  the  uncertain  weather 
which  prevails  during  the  growing  season,  make  agriculture 
the  chief  influencing  factor  upon  the  business  cycle.     Large 


BAROMETERS  OF  AGRICULTURE 


82  BUSINESS  FORECASTING 

harvests  make  for  general  prosperity,  and  poor  crops  have 
the  opposing  tendency. 

The  magnitude  of  the  harvests  is  not  predicated  upon  the 
acreage  planted;  climatic  conditions  are  of  even  greater  im- 
portance. With  the  exception  of  wheat,  the  prospective  crops 
cannot  be  estimated  with  any  large  degree  of  accuracy  before 
the  end  of  August.    The  wheat  crop  can  be  estimated  in  April. 


Chapter  VI 

BAROMETERS  OF  INDUSTRIAL  PRODUCTION 

Industrial  production. — Unlike  agriculture,  manufacturing 
may  be  readily  regulated  in  accordance  with  the  trend  in 
business  conditions.  For  this  reason,  industrial  activity 
serves  better  as  a  thermometer  of  business  than  as  a  barom- 
eter. A  decline  in  orders  causes  manufacturers  immediately 
to  curtail  operations.  Overhead  expenses  continue,  but  they 
comprise  a  comparatively  small  part  of  total  operating  costs, 
and  the  factories  find  it  economically  possible  to  reduce  the 
output  quickly  when  changing  conditions  warrant  such  a 
policy. 

The  number  of  workers  directly  engaged  in  manufacturing, 
according  to  the  Census  of  Manufactures  taken  in  1919,  was 
9, 103, 200. x  As  each  of  these  persons  may  be  regarded  as 
the  principal  wage-earner  in  a  family  of  four,  the  total 
number  of  persons  directly  affected  by  industrial  activity  in 
the  United  States  is  approximately  36,000,000.2  Prevailing 
conditions  in  industry  therefore  exert  a  powerful  influence 
upon  commerce.  A  dullness  in  manufacturing  directly  reduces 
the  purchasing  power  of  one-third  of  the  American  families, 
and  indirectly  affects  adversely  the  other  two-thirds. 

Industrial  production:  Iron  and  Steel. — Iron  is  known  as 
the  basic  industry.  This  is  because  iron  is  used  in  practically 
every  line  of  commercial  endeavor.  Iron  is  essential  in  con- 
struction work  of  every  description, — buildings,  machinery, 
tools,  rails,  locomotives,  cars,  and  ships.  An  increase  in 
industrial  activity  necessitates  a  corresponding  increase  in  the 
production  of  iron;  and  a  decline  in  manufacturing  influences 
a  substantial  decrease  in  the  output  of  iron. 

1  The  New  York  Times,  Oct.  5,  1921. 

'The  average  number  of  persons  to  a  family  in  the  United  States  was  4.7  in 
1900,  4.5  in  1910,  and  4.3  in  1920.— "Statistical  Abstract  of  the  United  States," 
1920,  p.  70. 

83 


84  BUSINESS  FORECASTING 

TABLE  No.  25.— PIG  IRON  PRODUCTION  IN  THE  UNITED  STATES, 

ANNUALLY,  1901-1920* 

Year  Tons  Year  Tons 

1901 15,878,354  1911 33,649,547 

1902 17,821,307  1912 29,726,937 

1903 18,009,252  1913 30,966,301 

1904 16,497,033  1914 23,332,244 

1905 22,992,380  1915 29,916,213 

1906 25,307,191  1916 39,434,797 

1907 25,781,361  1917 38,612,546 

1908 15,936,018  1918 38,230,440 

1909 25,795,471  1919 30,582,878 

1910 27,303,567  1920 36,414,114 

*  "The  Mines  Handbook,"  1920,  p.  49. 

The  annual  production  of  pig  iron  in  the  United  States 
during  the  period  from  1901  to  1920  is  shown  in  Table 
No.  25.  A  detailed  statement  of  the  production  by  months 
from  1911  to  1920  is  shown  in  Table  No.  26.  Production 
gained  steadily  from  1901  to  1907.  The  depression  of  1908 
and  the  recovery  in  1909  is  clearly  reflected.  The  inactivity 
of  1914  is  also  displayed  and  indicates  that  the  advent  of 
the  European  war  played  an  important  part  in  checking  a 
prolonged  depression.  The  decline  in  production  during  1919 
was  due  entirely  to  labor  and  transportation  difficulties.  The 
1920  output  did  not,  however,  foretell  the  industrial  depres- 
sion which  started  during  the  latter  part  of  the  year  and  con- 
tinued into  1921.  The  curtailment  of  production  during  the 
early  months  of  1921  was  most  rapid,  as  is  indicated  in  the 
following  comparison  between  corresponding  months  in  1920 
and  1921: 

Month                                                                         1920  1921 

tons  tons 

January    3,015,181  2,416,292 

February   2,978,879  1,937,257 

March    3,375,907  1,595,522 

April     2,739,797  1,193,041 

May     2,985,682  1,221,221 

June    3,043,540  1,064,833 

July    , 3,067,043  864,555 

An  analysis  of  the  statistics  on  pig  iron  production  indicates 
that  it  serves  acceptably  as  a  business  thermometer  but  not 
as  a  barometer.  A  gain  in  output  signifies  that  improvement 
in  business  has  already  set  in,  and  a  loss  in  production  reflects 
depression.  But  both  of  these  indications  serve  chiefly  to 
confirm  opinions  which  have  previously  become  current. 


INDUSTRIAL  BAROMETERS 


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INDUSTRIAL  BAROMETERS  87 

The  unfilled  orders  of  the  United  States  Steel  Corporation, 
as  shown  in  Table  No.  27,  are  also  used  as  an  index  in  the 
same  manner  as  pig  iron  production.  The  statement  of  un- 
filled orders  is  not  so  trustworthy,  however,  because  ( 1 )  a 
narrower  field  is  covered,  and  (2)  the  percentage  of  the 
total  output  of  steel  products  which  the  United  States  Steel 
Corporation  supplies  varies  at  different  periods,  and  is  always 
less  than  50  per  cent. 

Industrial  production:  Coal. — Fuel  consumption  is  a  fac- 
tor of  prime  importance  in  the  measurement  of  industrial 
activity.  The  chief  fuel  used  in  manufacturing  is  bituminous 
coal,  although  oil  is  gaining  rapidly  and  promises  eventually 
to  displace  coal.3  The  production  of  bituminous  coal  in  the 
United  States  from  1913  to  1920  is  shown  in  Table  No.  28. 
As  coal  is  consumed  almost  as  rapidly  as  it  is  produced4  the 
output  reflects  industrial  activity  to  no  small  extent.  Trans- 
'  portation  difficulties  and  labor  controversies,  however,  as  was 
illustrated  in  the  spring  of  1920,  often  cause  a  reduction  in 
output  when  industry  is  active. 

Industrial  production:  Imports. — The  volume — as  dis- 
tinguished from  value — of  the  imports  of  the  important  raw 
materials  used  in  manufacturing  affords  another  method  of 
measuring  industrial  activity.  Table  No.  29  shows  the  im- 
ports by  volume  of  the  six  most  important  raw  materials  used  in 
manufacturing  imported  annually  during  the  period  from  1901 
to  1920.  The  1920  exhibit  is  notable.  Silk,  hides,  and  wool 
declined  enormously  from  the  volumes  attained  in  1919. 
Rubber  imports  increased  despite  a  precipitous  decline  in 
the  market  price.  Tin  imports  exceeded  those  of  1919,  but 
were  materially  less  than  in  the  three  preceding  years. 

The  great  difficulty  in  interpreting  statistics  such  as  ap- 
pear in  Table  No.  29  is  to  allow  for  the  normal  growth  of 
the  country,  and  for  industrial  development  in  certain  lines. 
Silk  imports,  for  illustration,  should  show  a  definite  increase 

'The  fuel  used  in  manufacturing  in  1914  was  as  follows:  anthracite  coal, 
14,724,265  tons;  bituminous  coal,  166,699,827  tons;  oil,  48,689,232  barrels;  gas, 
285,609,876  thousand  feet. — "Statistical  Abstract  of  the  United  States,"  1920, 
p.  189. 

*The  mines  have  neither  the  facilities  nor  the  finances  necessary  to  store  coal 
at  the  mouth  of  the  mines  and  produce  only  when  cars  are  available  for  imme- 
diate loading.  Consumers  rarely  carry  a  surplus  stock  beyond  the  requirements 
of  the  near  future. 


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INDUSTRIAL  BAROMETERS 


89 


from  year  to  year  to  keep  pace  with  the  growth  of  the  nation. 
Such  an  increase  does  not  represent  greater  industrial  activity. 
The  development  of  the   automobile  business  has   caused  a 


TABLE  No.  29.— IMPORTS  OF  PRINCIPAL  RAW  MATERIALS  USED  IN 
MANUFACTURES  IN  THE  UNITED  STATES,  1901-1920* 

(according  to  quantities) 

Year                              Silk  (pounds)  Hides  (pounds)       Rubber  (pounds) 

1920 30,058,374  509,983,176  566,546,136 

1919 44,816,918  744,836,035  535,940,421 

1918 32,865,453  361,890,899  325,959,308 

1917 36,502,831  631,083,653  405,638,278 

1916 32,454,740  726,310,405  270,090,205 

1915 30,978,645  646,271,307  221,481,921 

1914 25,650,383  556,194,541  143,065,161 

1913 27,978,805  497,879,316  115,880,641 

1912 24,766,835  615,105,439  118,058,284 

1911 20,904,703  424,876,956  82,851,725 

1910 21,563,782  460,607,078     ■  100,806,186 

1909 22,227,185  572,776,503  93,967,414 

1908 18,723,119  328,446,882  76,289,474 

1907 15,691,444  355,547,950  68,653,291 

1906 16,844,035  398,526,863  67,907,251 

1905 15,514,718  381,140,412  64,147,741 

1904 16,578,005  300,825,242  61,889,758 

1903 11,655,333  288,987,843  55,744,120 

1902 13,762,254  325,184,528  50,851,257 

1901 12,277,991  310,193,987  55,142,810 

Year                              Wool  (pounds)  Fibers  (tons)  Tin  (pounds) 

1920 259,617,641  405,801  126,038,389 

1919 445,892,834  327,279  89,698,391 

1918 453,727,372  382,629  142,507,393 

1917 420,994,547  399,811  143,687,037 

1916 ..449,189,924  492,714  138,073,293 

1915 412,721,292  393,232  115,636,332 

1914 260,192,891  395,517  95,049,612 

1913 151,813,703  391,118  104,282,230 

1912 238,118,350  403,896  116,003,385 

1911 155,922,510  283,517  106,936,872 

1910 180,134,981  273,260  105,137,740 

1909 312,131,171  366,574  95,350,020 

1908 142,559,384  306,944  82,503,190 

1907 188,305,955  315,590  82,548,838 

1906 196,844,298  301,927  101,027,188 

1905 246,821,389  324,202  89,227,698 

1904 186,572,683  298,137  83,168,657 

1903 173,593,891  289,061  83,133,847 

1902 176,292,639  324,600  85,043,353 

1901 124,964,377  256,771  74,560,487 

*  "Monthly  Summary  of  Foreign  Commerce  of  the  United  States"  for  the 
period  1901-1920. 


90  BUSINESS  FORECASTING 

tremendous  increase  in  rubber  imports  and  prevented  the  1920 
imports  from  following  the  trend  shown  in  the  imports  of 
other  raw  materials  used  in  industries  which  have  attained 
a  more  stable  basis. 

Sources  of  information  on  industrial  production. — Statis- 
tics of  pig  iron  production  are  compiled  monthly  by  The  Iron 
Age,  a  weekly  publication  which  is  issued  on  Thursdays.  The 
pig  iron  production  of  each  month  appears  usually  in  the 
issue  of  the  first  Thursday  of  the  following  month.  The 
unfilled  orders  of  the  United  States  Steel  Corporation  are 
compiled  as  of  the  last  day  of  each  month  and  are  made  pub- 
lic about  the  tenth  of  the  following  month.  Bituminous  coal 
production  is  estimated  weekly  by  the  United  States  Geologi- 
cal Survey  of  the  Department  of  the  Interior,  and  usually 
appears  in  the  newspapers  on  Monday  of  the  second  follow- 
ing week.  Foreign  trade  figures  are  compiled  monthly  by 
the  Department  of  Commerce,  and  are  published  in  the 
"Monthly  Summary  of  Foreign  Commerce  of  the  United 
States"  during  the  latter  part  of  the  succeeding  month.5 

Secular  trend  and  seasonal  variation. — Secular  trend  and 
seasonal  variation  must  be  taken  into  consideration  in  the 
barometric  study  of  production.  A  gradual  increase  in  pro- 
duction is  a  normal  development  when  population  continually 
gains.  During  the  past  thirty  years  the  average  annual  in- 
crease in  production  has  been  around  3^  to  4  per  cent.6     A 

5  All  information  referred  to  in  this  paragraph  does  not  appear  in  the  daily 
papers.  The  Journal  of  Commerce  (New  York),  the  financial  section  of  the 
New  York  Evening  Post  on  Saturdays,  and  The  Commercial  and  Financial 
Chronicle  (New  York,  weekly)  are  worthy  of  mention,  among  others,  as 
periodicals  which  satisfactorily  cover  this  field. 

0  For  convenience  in  determining  the  cumulative  effect  of  an  advancing 
secular  trend  at  the  rate  of  4  per  cent  per  annum,  a  table  is  appended: 

Year  Per  cent.       Year  Per  cent.       Year  Per  cent. 

1 104.00  11 153.94  21 227.88 

2 108.16  12 160.10  22 236.99 

3 112.48  13 166.50  23 246.47 

4 116.98  14 173.16  24 256.33 

5 121.66  15 180.01  25 266.58 

6 126.53  16 187.30  26 277.25 

7 131.59  17 194.79  27 288.34 

8 136.85  18 202.58  28 299.87 

9 142.33  19 210.68  29 311.86 

10 148.02  20 219.11  30 324.34 

To  illustrate,  production  in  1900  should  have  been  148.02  per  cent  of  the  1890 

output,  in   1910,  219.11  per  cent  of  1890,  and  in   1920,  324.34  per  cent  of  1890. 

Likewise,  production  in  1910  should  have  been  148.02  per  cent  of  that  in  1900, 

and  in  1920,  219.11  per  cent  of  1900. 


INDUSTRIAL  BAROMETERS 


91 


CHART    VII.— PIG-IRON    PRODUCTION    IN    THE    UNITED    STATES, 

CORRECTED   FOR  SECULAR  TREND  AND   SEASONAL 

VARIATION:  1903-1917* 


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•Pig-Iron   Production:  Actual   Figures.         (Unit    1,000   gross  tons.) 


190]         1904  1905-         1906         1907         1908  1909         1910)  1911  1912  1913  1914  J9I5  1916 

Pig-Iron  Production:  Figures  Corrected  for  Long-Time  Movement.    (Percentages.) 


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Pig-iron   Production:   Corrected   Figures.      (Percentages.) 


*  From  "The  Index  of  General  Business  Conditions,"  page  5,  published  by  the 
Committee  on  Economic  Research  of  Harvard  University. 


92  BUSINESS  FORECASTING 

gain  of  this  nature  is  known  as  the  secular  trend  and  unless 
allowance  is  made  for  its  influence,  production  statistics  are 
liable  to  false  interpretation.7 

Likewise  seasonal  variation  must  be  considered.  Bitumin- 
ous coal  production  is  not  constant  throughout  the  year.  The 
output  always  increases  during  the  winter  months  and  de- 
creases during  the  summer  months.  A  weekly  production  of 
9,000,000  tons  in  June  reflects  greater  activity  than  10,000,000 
tons  in  November.  Iron  and  steel  production  have  large  sea- 
sonal variations.8 

Industrial  production  as  a  business  barometer. — The  facil- 
ity with  which  industrial  productivity  can  be  regulated  with 
changing  business  conditions  makes  this  factor  one  of  uncom- 
mon value  in  the  measurement  of  current  business  activity. 
But  the  fact  that  industry  is  regulated  with  changing  condi- 
tions indicates  that  the  major  cause  of  the  change  is  external 
rather  than  internal  so  far  as  industry  is  concerned.  While 
this  is  true  in  the  larger  sense,  since  agricultural  production 
is  the  major  determinant,  industry  contributes  itself  to  the 
forces  which  govern  industrial  activity.  That  facility  which 
enables  industrial  production  readily  to  be  augmented  or 
diminished  permits  stages  of  overproduction  at  one  time  and 
underproduction  at  another.     Stability  in  business  conditions 

T  "The  fact  which  stands  out,  of  course,  in  all  these  investigations,  is  the 
amazingly  even  character  of  this  production  growth,  and  how  very  slight  is  the 
variation  in  the  flow  of  goods  from  year  to  year  throughout  periods  of  wide 
prosperity  or  deep  depression;  how  slightly  it  was  affected  by  the  war,  and  how 
little  relationship  it  often  bore  to  the  prevailing  spirit  or  traditional  idea  of  a 
given  time." — Carl  Snyder,  in  The  American  Economic  Review,  vol.  XI,  No.  1, 
p.  71. 

8 The  influence  of  secular  trend  and  seasonal  variation  has  been  exceptionally 
well  illustrated  in  an  article  entitled  "The  Index  of  General  Business  Condi- 
tions" written  by  Prof.  W.  M.  Persons  and  issued  by  the  Harvard  University 
Committee  on  Economic  Research.  The  production  of  pig  iron  in  the  United 
States  in  March,  1904,  was  1,447,000  tons;  in  February,  1908,  1,077,000  tons; 
and  in  December,  1918,  3,434,000  tons.  The  problem  is  to  determine  which 
figures  represent  the  greatest  relative  activity.  On  the  basis  of  the  secular 
trend,  the  normal  output  in  February,  1908,  should  have  been  1,901,000  tons, 
and  in  December,  1918,  2,932,000  tons.  On  this  basis,  the  ratios  of  actual  pro- 
duction to  normal  output  were  95  per  cent,  57  per  cent,  and  117  per  cent,  respec- 
tively. Further  correction  must  be  made  to  allow  for  seasonal  variation,  as 
three  different  months  are  involved.  The  ratios  of  average  output  for  March, 
February,  and  December  are  respectively  106,  94,  and  100.  Through  subtract- 
ing the  seasonal  relatives  of  106,  94  and  100  from  the  relatives  95,  57,  and  117, 
comparable  differences  of  — 11,  — 37,  and  — |— 17  are  found.  "The  deviations 
reveal  the  depression  in  March,  1904,  the  deep  depression  of  February,  1908, 
and  the  great  activity  of  December,  1918." 


INDUSTRIAL  BAROMETERS  93 

depends  upon  uniformity  of  production  in  all  lines.  The  fact 
that  agricultural  production  is  not  subject  to  this  control  is 
the  chief  factor  which  causes  the  fluctuations  in  commercial 
activity.  And,  although  industrial  production  can  be  regu- 
lated to  insure  uniformity  with  conditions  throughout  com- 
merce, the  enhanced  profits  which  arise  during  periods  of 
activity  cause  industrial  production  to  be  increased  far  beyond 
conservative  warrant,  and  subsequent  reaction  is  inevitable. 

The  most  successful  men  in  business  are  those  whose  per- 
ception is  not  blinded  nor  distorted  through  profits.  Diffi- 
cult indeed  is  the  assumption  of  a  conservative  attitude  toward 
production — founded  though  it  may  be  upon  the  appreciation 
that  a  lack  of  balance  is  rapidly  developing — when  earnings 
are  abnormally  large.  And  in  this  manner,  the  facility  with 
which  industrial  activity  can  be  regulated  becomes  a  disad- 
vantage rather  than  an  advantage.  The  inability  of  industrial 
producers  to  get  and  utilize  a  true  perspective  of  the  entire 
business  situation  in  order  that  a  parallelism  may  be  main- 
tained between  conditions  of  supply  and  demand  contributes 
materially  to  the  alternate  development  of  periods  of  extreme 
prosperity  and  depression. 

From  a  barometric  viewpoint,  industrial  production  is  too 
great  or  too  small,  not  by  comparison  with  productivity  at 
a  preceding  time,  but  in  relationship  to  existing  conditions 
throughout  the  commercial  world.  Industry  should  keep 
pace  with  agriculture,  with  conditions  abroad,  and  with  the 
money  market.  Irrespective  of  current  earnings,  increased 
industrial  activity  is  ill-founded  if  agricultural  production, 
foreign  conditions,  and  the  money  market  are  not  equally 
favorable.  The  relative  balance  between  industrial  produc- 
tion and  these  external  factors  should  be  the  subject  of  con- 
stant scrutiny,  especially  in  times  of  activity,  as  herein  develop 
earliest  the  indications  of  ensuing  changes  in  the  business 
cycle. 

Structural  production. — As  has  been  shown  in  the  discus- 
sion of  the  business  cycle9  new  construction  is  noticeably  af- 
fected by  changing  business  conditions.  An  era  of  rising 
prices  acts  as  a  deterrent  to  building,  and  for  this  reason, 
the  height  of  a  period  of  prosperity  customarily  finds  con- 
struction  substantially  curtailed.      When   prices   are   falling, 

.   "Part  I,  Chapters  II  and  III. 


94  BUSINESS  FORECASTING 

building  operations  are  encouraged,  although  a  natural  ten- 
dency exists  to  wait  until  the  bottom  has  been  reached. 

Accurate  and  comprehensive  figures  which  would  state  the 
volume  of  building  operations  in  progress  would  be  most 
helpful  in  measuring  productive  activity.  Unfortunately  no 
such  figures  are  available.  The  best  that  has  been  done  thus 
far  has  been  to  compile  aggregate  totals  of  the  building  per- 
mits issued  in  leading  cities,  as  is  shown  in  Table  No.  30. 
Such  compilations  are  subject  to  two  important  qualifications : 
(1)  permits  are  often  granted  for  projects  which  are  sub- 
sequently abandoned;  and  (2)  permits  are  stated  on  a  value 
basis  which  makes  comparison  between  periods  invidious  be- 
cause of  changes  in  price  levels  and  wage  scales. 

Table  No.  30  shows  that  total  permits  in  1918  were 
valued  at  $385,122,612  in  comparison  with  $826,100,319  in 
1913.  As  the  level  of  prices  in  1918  was  more  than  double 
that  of  1913,  actual  operations  in  1913  were  more  than  four 
times  those  in  1918.  That  a  drop  in  prices  does  not  im- 
mediately cause  a  revival  in  building  operations  is  shown 
in  the  permits  granted  during  the  last  six  months  of  1920 
when  prices  were  falling  more  rapidly  than  at  any  previous 
time  in  our  commercial  history.  Permits  issued  during  the 
third  quarter  of  1920  amounted  to  $321,212,555  in  com- 
parison with  $417,579,051  in  1919;  for  the  last  quarter  in 
1920,  $226,097,448  compared  with  $418,711,778  in   1919. 

Structural  production  as  a  business  barometer. — The  trend 
of  structural  production  is  well-defined  throughout  the  busi- 
ness cycle  and  is  of  particular  barometric  interest  because  it 
differs  radically  from  either  agricultural  or  industrial  pro- 
duction. Agriculture  is  conducted  largely  irrespective  of 
business  conditions;  industry  is  at  a  maximum  during  periods 
of  prosperity  and  at  a  minimum  during  periods  of  depression. 
Construction  is  at  its  maximum  during  a  period  of  activity  but 
significantly  begins  to  decline  well  before  the  general  trend 
of  conditions  reaches  its  highest  point.  Moreover,  in  periods 
of  depression,  building  activity  is  resumed  well  before  the 
general  trend  moves  upward. 

A  practical  difficulty  of  large  importance,  however,  limits 
the  use  of  this  factor  as  a  barometer.  Statistics  available  are 
grossly  inadequate  as  they  mainly  comprise  the  value  of  per- 
mits granted  in  certain  cities.  Construction  statistics,  to  be 
of  maximum  service,  should  represent  the  entire  country  and 


INDUSTRIAL  BAROMETERS 


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96  BUSINESS  FORECASTING 

cover  the  broad  field — bridges,  railroads,  and  tunnels  for 
example — instead  of  simply  building  permits  or  contracts 
awarded. 

A  general  index  of  industrial  production. — In  view  of  the 
accepted  doctrine  that  alternate  periods  of  prosperity  and 
depression  arise  out  of  maladjustments  in  conditions  of  sup- 
ply and  demand,  i.e.,  in  the  lack  of  balance  in  production 
generally,  it  is  surprising  that  earlier  attempts  have  not  been 
made  to  construct  production  indexes  which  would  permit 
ready  comparison  of  the  relative  current  activity  in  the  major 
lines  of  industry.  An  attempt  to  devise  such  an  index  is  now 
being  worked  out  by  the  Federal  Reserve  Bank  of  New  York. 

"But  if  the  problem  of  measurement  of  the  national  pro- 
duct has  now  been  disposed  of,  there  remains  yet  another, 
and  that  is  the  measurement  of  the  current  product;  and  for 
practical  affairs  this  is  of  far  greater  importance.  The  varia- 
tions in  the  business  cycle,  as  Professor  Mitchell  has  so  clearly 
set  forth,  lie  perhaps  as  much  as  anything  in  a  dislocation 
between  the  even  pace  in  the  different  lines  of  industry — too 
rapid  expansion  in  one  direction,  too  little  in  another,  so  as 
to  disturb  the  normal  equilibrium.  The  whole  of  the  national 
product  does  not  greatly  vary,  but  that  of  the  several  indus- 
tries may  vary  quite  widely.  Now,  in  very  large  part,  goods 
are  exchanged  for  goods  and  services  for  services;  and  if  there 
be  overexpansion  in  this  line  or  that,  there  comes  inevitably 
overproduction  in  special  lines,  a  period  of  crisis  for  these 
industries,  unemployment,  failures,  and  all  the  traditional 
phenomena  of  lack  of  balance."10 

As  is  shown  in  Table  No.  31,  some  twenty-five  of  the  lead- 
ing industries  are  included.  Eventually  it  is  expected  that 
a  dozen  more  will  be  added,  and  in  this  manner  compre- 
hensive indices  will  be  possible.  uBy  reducing  each  of  the 
industries  to  a  common  denominator  we  shall  know  by  means 
of  index  figures  exactly  whether  we  are  producing  very  much 
more  pig  iron  or  copper  or  sugar,  or  importing  more  rubber 
or  silk  or  wool  than  the  normal  need.  It  was  very  striking, 
when  we  first  obtained  these  indices,  to  note  how  clear  was 
the  overproduction  in  certain  lines  and  the  very  large  cer- 
tainty that  there  would  be  inevitably  a  collapse  in  these 
special   industries.      In   fact,   from  the  relative  height  of  the 

10  The  American  Economic  Review,  vol.  XI,  No.  1,  p.  72. 


INDUSTRIAL  BAROMETERS 


97 


TABLE   No.   31.— INDICES   OF  CURRENT  PRODUCTION   AND   TRADE* 

Base:  Average  of  the  12  months  of  1917  —  100 

Seasonal  variation  eliminated 


Items 


1.  Pig   iron    82.2 

2.  Steel    ingots    83.4 

3.  Bituminous  coal 91.6 

4.  Anthracite  coal    92.6 

5.  Copper     67.2 

6.  Tin  deliveries   64.3 

7.  Cement   92.9 

8.  Petroleum    123.3 

9.  Gas  and  fuel  oil    127.7 

10.  Cotton   consumption    90.7 

11.  Wool   consumption    110.1 

12.  Silk  imports    165.1 

13.  Wheat  flour    119.3 

14.  Cattle   slaughtered    105.1 

15.  Swine   slaughtered    115.0 

16.  Sheep   slaughtered    145.2 

17.  Sugar  refined  121.7 

18.  Tobacco,  cigars,  etc 93.4 

19.  Rubber  imports    114.7 

20.  Wood  pulp  93.6 

21.  Paper    113.5 

22.  Railway  cars 181.6 

23.  Locomotives 59.8 

24.  Building  activity  73.3 

25.  Imports    122.5 

Average     of     25     comparable 
items 106.0 

Bank  clearings  outside  N.  Y.  City  121.5 

Railway  tonnage 103.0 

Employment,  N.  Y 95.5 

Bank  clearings,  N.  Y.  , 117.5 

Shares  sold,  N.  Y.  S.  E 179.0 

Per  cent  firms  failing 37 

Exports    106.5 

Foreign  trade  tonnage 105.8 


v.   a 
k. 

N 

S1^ 

^  o 

.  «■> 

s 

R 
o 

s 

<s  ■£ 

k.    w 

E>  a 

On 

S 

71.5 

98.5 

90.5 

100.2 

73.9 

98.5 

90.0 

96.9 

75.8 

99.2 

96.4 

96.0 

94.3 

89.4 

85.1 

77.7 

71.0 

76.1 

73.5 

70.1 

114.1 

98.4 

92.3 

97.7 

97.8 

121.7 

94.6 

97.9 

119.1 

125.5 

134.3 

140.8 

129.0 

120.5 

129.8 

154.1 

91.7 

97.1 

96.1 

88.7 

119.1 

125.7 

105.5 

68.5 

120.2 

144.7 

91.7 

78.5 

109.2 

113.1 

95.1 

97.0 

104.0 

107.0 

97.9 

92.5 

108.3 

115.0 

120.7 

115.5 

148.1 

118.7 

108.2 

i 
128.2 

94.1 

124.9 

121.0 

108.8 

106.7 

113.8 

106.4 

93.2 

157.7 

222.0 

130.1 

130.5 

111.5 

106.2 

124.7 

108.2 

118.7 

125.5 

131.0 

132.2 

103.2 

52.7 

37.7 

40.5 

30.5 

26.2 

43.2 

52.9 

73.4 

56.9 

36.1 

33.9 

124.2 

132.7 

131.9 

140.1 

102.7 


108.4 


98.6 


97.6 


117.1 

112.8 

108.2 

118.2 

97.1 

108.8 

104.8 

117.6 

98.6 

102.7 

101.9 

98.8 

113.0 

98.8 

92.2 

95.9 

199.1 

152.4 

117.3 

89.6 

.36 

.32 

.41 

.50 

78.9 

96.7 

99.9 

95.5 

107.6 

121.8 

121.0 

139.5 

*  The  American  Economic  Review,  vol.  XI,  No.  1,  p.  74. 


98  BUSINESS  FORECASTING 

indices  you  could  pretty  well  pick  them  off  in  the  order  in 
which  the  decline  would  and  did  come."11 

Up  to  the  time  the  present  volume  is  being  written,  regular 
publication  of  the  indices  of  production  and  trade  as  shown 
in  Table  No.  31  had  not  started  because  of  the  desire  of  the 
compilers  to  have  the  tabulation  as  comprehensive  as  possible 
from  the  beginning.  It  is  planned  to  compile  these  statistics 
monthly  and  undoubtedly  publication  will  begin  in  the  near 
future — probably  by  the  time  this  book  has  left  the  press. 
The  report  will  prove  of  invaluable  assistance  in  barometric 
work. 

u  The  American  Economic  Review,  vol.  XI,  No.  1,  p.  72. 


Chapter  VII 

BAROMETERS  OF  MARKETING 

The  second  major  function  of  business. — Distribution,  or 
marketing,  as  it  is  more  popularly  known,  constitutes  with 
production  the  two  main  functions  of  business.  In  the  broad 
sense,  marketing  is  a  phase  of  production  as  it  comprehends 
the  supplying  of  place  and  time  utility  to  the  commodities  of 
every-day  need.  Statistics  of  marketing,  therefore,  serve  to 
supplement  those  of  production.  The  element  of  price,  and 
incidentally  of  profit,  enters  into  marketing  records  in  contrast 
to  production  statistics  which  are  almost  entirely  on  a  basis 
of  volume. 

Marketing  statistics  may  be  divided  into  four  classes  under 
an  arbitrary  arrangement  predicated  upon  the  nature  of  the 
information  available.  The  four  classes  are  :  ( 1 )  commodity 
prices;  (2)  commodity  shipments;  (3)  foreign  trade;  and 
(4)  retail  sales.  Commodity  prices  and  retail  sales  are  natur- 
ally considered  on  a  basis  of  value,  and  commodity  shipments 
on  a  basis  of  volume.  Foreign  trade  records  give  both  value 
and  volume. 

COMMODITY    PRICES 

Commodity  prices. — As  has  been  shown  in  an  earlier  chap- 
ter, price  has  become  the  most  important  term  in  commerce. 
Men  engage  in  business  to  gain  profit,  and  profit  is  determined 
by  the  relationship  between  prices.  Prices  are  never  constant. 
At  one  time,  a  period  of  high  prices  exists,  and,  at  another, 
low  prices  prevail.  All  commodities  are  not  affected  similarly, 
moreover,  as  there  is  a  considerable  lack  of  uniformity  in  the 
manner  in  which  prices  change. 

The  measurement  of  average  prices,  i.e.,  the  establishment 
of  a  price  level,  is  a  problem  of  extreme  difficulty.  The  ideal 
solution  would  be  to  have  a  single  number  which  would  re- 
flect the  current  price  on  all  commodities  and  which  would  take 
into  consideration  the  relative  importance  of  each  commodity. 

99 


100  BUSINESS  FORECASTING 

The  construction  of  such  an  index  number,  however,  would  be 
impracticable,  as  is  readily  appreciable.  The  index  numbers  in 
current  use  are  therefore  considered  to  be  approximate  and  to 
have  an  allowable  margin  of  error  up  to  10  per  cent.1 

American  index  numbers. — No  attempt  has  thus  far  been 
made  to  secure  an  index  of  general  retail  prices  in  this  country. 
Retail  quotations  vary  so  widely  even  in  a  single  community 
that  the  magnitude  of  the  work  involved  in  securing  a  com- 
prehensive number  of  prices  precludes  its  accomplishment.2 

Wholesale  prices  do  not  vary  so  widely  as  retail,  and  repre- 
sentative quotations  are  readily  obtainable.  The  difficulty  lies 
in  the  choice  of  commodities  and  the  relative  weight  to  be  as- 
cribed to  each.  Although  entirely  different  methods  are  em- 
ployed in  the  construction  of  the  two  leading  American  index 
numbers,  Bradstreet's  and  the  Department  of  Labor,  the  re- 
sults have  proved  quite  uniform,  as  may  be  seen  in  Table  No. 
32. 

Bradstreet's  index. — The  Bradstreet  index  is  a  number 
which  represents  the  aggregate  wholesale  prices  per  pound  of 
96  staple  commodities  divided  into  13  general  groups.  An 
index  is  constructed  for  each  of  the  groups,  and  the  sum  of  the 
separate  indexes  is  the  index  for  all.  As  the  index  is  not  on 
a  percentage  basis,  no  base  period  is  necessary.  The  index 
number  is  published  about  the  tenth  of  each  month  and  rep- 
resents the  prices  for  the  first  day  of  the  current  month.  A 
yearly  index  number  is  secured  by  averaging  the  index  num- 
bers for  the  twelve  months.  The  index  number  as  reported 
monthly  for  the  ten-year  period  1911-1920  in  shown  in  Table 
No.   33. 

Department  of  Labor  index. — The  Bureau  of  Labor  Statis- 
tics of  the  Department  of  Labor  compiles  monthly  an  index 
number  of  wholesale  prices.  Unlike  the  Bradstreet  index  num- 
ber, that  of  the  Department  of  Labor  is  on  a  percentage  basis. 
Originally  the  average  prices  during  the  period  of  10  years 

1  "Today  few,  if  any,  competent  judges  doubt  the  validity  of  index  numbers 
or  the  substantial  accuracy  of  the  results  they  show  when  properly  constructed 
from  carefully  collected  data.  Indeed  the  danger  at  present  is  rather  that  the 
figures  as  published  will  be  taken  too  absolutely  as  a  complete  representation  of 
the  facts  about  price  fluctuations." — "Index  Numbers  of  Wholesale  Prices  in  the 
United  States  and  Foreign  Countries,"  W.  C.  Mitchell,  U.  S.  Dept.  of  Labor  Bui. 
No.  173,  p.  10. 

2  The  United  States  Department  of  Labor  compiles  an  index  of  retail  food 
prices  which  appears  in  its  Monthly  Labor  Review;  also  a  cost  of  living  index 
which  includes  prices  for  services  as  well  as  for  commodities. 


BAROMETERS  OF  MARKETING 


101 


m            •■»            m             h           £ 

a>              eo              o             fo              <*              o 

PROSPERITY 

1890 

1891 

1892 

MAJOR   CRISIS 

1693 

~1_ 

j— 

1894 

/ 

■9    DEPRESS  IOH 

legs 

1 

1896 

1 

1 

RECOVERY 

1857 

1898 

\~ 

1899 

\ 

PROSPERITY 

19f)0 

\ 

1901 

/ 

o 

1902 

A 

H 
U 

1903 

P  w 
p. 

1904 

ICES   IN  THE  UNITE 
reef  a    Index   Numb 

1832   -  1920 

1905 

1906 

{ 

s 

MAJOR  CRISIS 

1907 

\ 

i 

DEPRESSION 

190S 

/ 

w 

i 

RECOVERY 

19Q9 

\ 

to 

PROSPERITY 

JL5UD 

\ 

1911 

1912 

\ 

191  S 

1914 

1916 

1916 

1917 

me 

191? 

1 

i 

HAJOR  CRI91S 

land 

102  BUSINESS  FORECASTING 

TABLE  No.  32.— WHOLESALE  PRICES  IN  THE  UNITED  STATES, 

1890-1920 

United  States 
Year  Bradstreet's  Department  of  Labor 

1890 $ 81 

1891 82 

1892 7.7769  76 

1893 7.5324  77 

1894 6.6846  69 

1895 6.4346  70 

1896 5.9124  66 

1897 6.1159  67 

1898 6.5713  69 

1899 7.2100  74 

1900 7.8839  80 

1901 7.5746  79 

1902 7.8759  85 

1903 7.9364  85 

1904 7.9187  86 

1905 8.0987  85 

1906 8.4176  88 

1907 8.9045  94 

1908 8.0094  91 

1909 8.5153  97 

1910 8.9881  99 

1911 8.7129  95 

1912 9.1867  101 

1913 9.2115  100 

1914 8.9985  100 

1915 9.8530  101 

1916 11.8236  124 

1917 15.6385  176 

1918 18.7117  196 

1919 18.6642  212 

1920 18.8096  243 

from  1890  to  1899  was  taken  as  a  base.  The  present  method 
takes  the  year  1913  as  the  base  period,  and  previous  index 
numbers  have  been  revised  in  accordance.  Average  monthly 
prices  are  taken  rather  than  the  price  as  of  the  first  day. 
Over  300  commodities  are  included,  in  comparison  with  96 
used  in  the  Bradstreet  index.3  The  Department  of  Labor 
index  is  obviously  more  scientifically  constructed  than  the 
Bradstreet.  But  the  promptness  with  which  the  Bradstreet 
index  is  published,  coupled  with  the  uniformity  with  which  it 
agrees  with  the  Department  index,  makes  the  Bradstreet  in- 
dex of  much  more  popular  interest.  The  annual  index  number 
of  the  Department  of  Labor,  by  groups  of  commodities  during 
the  period  from  1890  to  1920  is  shown  in  Table  No.  34. 

*The  December,   1920,  index  represented  326  commodities.     Monthly  Labor 
Review,  February,  1921,  p.  42. 


BAROMETERS  OF  MARKETING 


103 


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104  BUSINESS  FORECASTING 

TABLE  No.  34.— UNITED  STATES  DEPARTMENT  OF  LABOR 
Index  Numbers  of  Wholesale  Prices,  1890  to  1920,  by  Groups  of  Commodities* 

■s       «    a         -2  « 

•ft                      ^2          ''5       «               *      "*  '•«  "  -5 

Year                e      •*      "S      *    ag      sgssi  s  e 

£        £        ^        £     S           *     5  £  ^^ 

1890 68    89    94    69   114    72    90    72  92  81 

1891 73    89    91    68   102    70    92    72  92  82 

1892 66    80    91    66    93    67    91    71  88  76 

1893 67    87    88    66    85    68    90    68  91  77 

1894 59    77    78    61    72    66    83    67  86  69 

1895 60    74    78    67    77    64    88    62  82  70 

1896 54    67    75    69    80    63    91    58  80  66 

1897 58    71    75    62    71    62    89    56  80  67 

1898 61    76    79    61    71    65    93    61  79  69 

1899 62    75    82    71   108    71    96    62  82  74 

1900 69    79    88    80   106    76    97    69  91  80 

1901 73    80    82    78    98    73    98    69  90  79 

1902 81    85    84    92    97    77    97    73  92  85 

1903 75    82    88   105    96    80    96    74  94  85 

1904 80    87    89    91    88    80    97    73  94  86 

1905 77    86    91    87    98    85    96    71  95  85 

1906 78    84    97    90   113    94    94    74  97  88 

1907 85    89   104    93   120    97    96    80  101  94 

1908 85    94    94    91    94    92   100    78  97  91 

1909 97    99    98    88    92    97   101    77  109  97 

1910...: 103   100    99    84    93   101   102    80  116  99 

1911 93    99    96    82    89   101   103    85  104  95 

1912 101   108    98    89    99   100   101    91  101  101 

1913 100   100   100   100   100   100   100   100  100  100 

1914 103   103    98    96    87    97   101    99  99  100 

1915 105   104   100    93    97    94   114    99  99  101 

1916 122   126   128   119   148   101   159   115  120  124 

1917 189   176   181   175   208   124   198   144  155  176 

1918 220   189   239   163   181   151   221   196  193  196 

1919 234   210   261   173   161   192   179   236  217  212 

1920 218   236   302   238   186   308   210   366  236  243 

*  Monthly  Labor  Review,  vol.  XII,  No.  2,  p.  45. 

Price  fluctuations. — Rising  prices  signify  a  period  of  in- 
creasing business  activity  and  lowering  prices  indicate  a  period 
of  dullness.  Although  the  manner  in  which  prices  change, 
and  the  cause  of  the  changes  have  been  previously  discussed, 


BAROMETERS  OF  MARKETING 


105 


106 


BUSINESS  FORECASTING 


BAROMETERS  OF  MARKETING 


07 


108 


BUSINESS  FORECASTING 


BAROMETERS. OF  MARKETING 


109 


110 


BUSINESS  FORECASTING 


BAROMETERS  OF  MARKETING 


111 


112 


BUSINESS  FORECASTING 


BAROMETERS  OF  MARKETING  113 

a  third  important  aspect  of  the  price  situation  is  found  in  the 
total  lack  of  uniformity  in  the  fluctuations.  This  is  clearly 
indicated  in  Table  No.  34. 

During  the  period  from  1896  to  1913,  a  gradually  rising 
price  movement  was  in  progress  throughout  the  United  States. 
The  index  number  rose  from  66  in  the  former  to  100  in  the 
latter  year.  But  this  appreciation  was  not  uniform  as  to  time 
or  to  commodities.  In  four  of  the  years — 1901,  1905,  1908, 
and  1911 — a  decline  occurred.  During  this  period,  chemicals 
advanced  in  price  but  10  per  cent,  in  comparison  with  a  25 
per  cent  gain  in  metal  prices,  a  50  per  cent  increase  in  food 
prices,  and  almost  a  100  per  cent  gain  in  the  prices  of  farm 
products.  The  widest  range  in  fluctuations  is  shown  in  farm 
products  (54-100),  house  furnishing  goods  (56-100),  fuel 
(61-100),  and  food  (67-100).  The  narrowest  range  is  found 
in  chemicals  (83-100^  cloths  (75-100),  and  metals  (72-100). 

During  the  war  period  from  1914  to  1920,  prices  advanced 
with  unprecedented  rapidity.  The  Department  of  Labor  in- 
dex for  1920  showed  an  advance  of  143  per  cent  over  that 
of  1913.  House  furnishing  goods  made  the  greatest  gain, 
266  per  cent.  Building  material  prices  went  up  208  per  cent; 
clothing,  202  per  cent;  fuel,  138  per  cent;  food,  136  per  cent; 
farm  products,  134  per  cent;  chemicals,  121  per  cent,  and 
metals,  108  per  cent. 

The  price  decline  in  1920-1921. — The  index  number  of  the 
Department  of  Labor  reached  its  maximum  in  May  1920 — 
272,  or  an  advance  of  172  per  cent  over  the  level  of  prices  in 
1913.  Of  the  nine  groups  of  commodities  which  are  consid- 
ered in  the  construction  of  the  index,  but  two  reached  their  high- 
est point  in  this  month.  As  is  shown  in  Table  No.  35,  clothing 
prices  were  highest  in  March,  farm  products  and  metals  in 
April,  while  in  May,  when  the  aggregate  was  greatest,  food 
and  building  materials  reached  their  peak.  It  is  significant 
to  note  that  at  this  time,  farm  products  and  metals  prices  had 
already  started  downward. 

The  usual  sequence  of  price  changes  in  a  falling  market 
was  well  illustrated.  Raw  materials,  notably  silk,  wool,  hides, 
cotton,  and  copper,  declined  rapidly  during  the  spring  and 
early  summer  months  of  1920;  wholesale  prices  were  reduced 
during  the  late  summer  and  autumn  months;  retail  prices,  as 
laggard  as  usual,  did  not  fall  off  until  late  winter,  and  wages, 


114 


BUSINESS  FORECASTING 


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BAROMETERS  OF  MARKETING  115 

the  last  of  all  to  change,  were  not  materially  affected  until 
the  summer  of  1921. 

The  amazing  feature  of  the  decline  was  the  rapidity  with 
which  it  was  accomplished.  The  advance  in  prices  which  de- 
veloped at  an  unprecedented  rate  during  the  preceding  five 
years  was  lost  in  a  period  of  slightly  over  twelve  months. 
The  current  belief  had  been  that  the  decline  would  be  decidedly 
gradual  and  that  it  would  require  a  period  at  least  as  long  as 
that  during  which  prices  rose.  Certain  leading  economists 
had  declared  that  a  permanently  higher  level  of  prices  had 
been  reached.4 

Relationship  of  farm  product  prices  to  general  prices. — 
The  trend  of  general  commodity  prices  follows  the  trend  of 
the  prices  of  farm  products  with  surprising  uniformity.  In 
but  three  years  out  of  the  thirty,  from  1890  to  1920,  has  the 
change  in  the  general  level  of  commodity  prices,  as  compiled 
by  the  United  States  Department  of  Labor  and  as  illustrated 
in  Table  No.  36,  failed  to  coincide  with  the  trend  in  farm 
products.  This  substantiates  the  belief  that  price  movements 
are  largely  attributable  to  agricultural  production. 

Commodity  prices  as  a  business  barometer. — The  entire 
objective  of  business  forecasting  resolves  itself  into  an  at- 
tempt to  predetermine  price  movements.  Peculiarly  enough, 
the  starting-point  must  be  prices  as  they  are  and  as  they  have 
been.  Experience  has  shown  that  the  lower  prices  fall,  the 
greater  will  be  the  subsequent  rise;  and  the  higher  prices  ad- 
vance, the  larger  will  be  the  ensuing  decline.  The  dullness 
which  pervades  business  when  prices  are  falling  is  certain  to 
change  to  activity  when  prices  again  advance;  and  the  activity 
which  permeates  commerce  when  prices  are  rising  is  equally 
certain  to  change  to  depression  when  prices  begin  their  inevit- 
able fall. 

4  "Business  men  should  face  the  facts.  To  talk  reverently  of  1913-1914  prices 
is  to  speak  a  dead  language  today.  Price  recessions  have  been  insignificant. 
The  reason  is  that  we  are  on  a  new  high-price  level  which  will  be  found  a 
stubborn  reality." — Prof.  Irving  Fisher  in  The  American  Review  of  Reviews, 
June,  1919,  vol.  LIX,  No.  6,  p.  598. 

"If  the  Federal  Reserve  Board  succeeds  in  checking  the  speculative  movement 
there  is  prospect  of  a  gradual  improvement  in  production  and  a  fairly  stable 
level  of  prices  in  1920." — Prof.  Wesley  C.  Mitchell  in  Bankers  Statistics  Cor- 
poration Weekly  Service,  February  10,  1920,  vol.  I,  No.  17,  sec.  2,  p.  6. 

"With  the  general  conclusion  that  we  are  not  likely  to  witness  any  consider- 
able fall  in  the  general  level  of  prices  in  the  immediate  future,  I  find  myself  in 
substantial  accord." — Prof.  H.  G.  Moulton  in  The  Journal  of  Political  Economy, 
November,  1919,  vol.  XXVII,  No.  9,  p.  782. 


116 


BUSINESS  FORECASTING 


TABLE  No.  36.— RELATIVE  CHANGES  IN  WHOLESALE  PRICES  OF 
FARM  PRODUCTS  AND  ALL  COMMODITIES,  1890-1920* 

Year  Farm  products  All  commodities 

1890 

1891 Plus  5  Plus  1 

1892 Minus  7  Minus  6 

1893 Plus  1  Plus  1 

1894 Minus  8  Minus  8 

1895 Plus  1  Plus  1 

1896 Minus  6  Minus  4 

1897 Plus  4  Plus  1 

1898 Plus  3  Plus  2 

1899 Plus  1  Plus  5 

1900 Plus  7  Plus  6 

1901 Plus  4  Minus  1 

1902 Plus  8  Plus  6 

1903 Minus  6  No  change 

1904 Plus  5  Plus  1 

1905 Minus  3  Minus  1 

1906 Plus  1  Plus  3 

1907 Plus  7  Plus  6 

1908 No  change  Minus  3 

1909 Plus  12  Plus  6 

1910 Plus  6  Plus  2 

1911 Minus  10  Minus  4 

1912 Plus  8  Plus  6 

1913 Minus  1  Minus  1 

1914 Plus  3  No  change 

1915 Plus  2  Plus  1 

1916 Plus  17  Plus  23 

1917 Plus  67  Plus  52 

1918 Plus  51  Plus  20 

1919 Plus  14  Plus  16 

1920 Minus  16  Plus  29 

*  Compiled  from  the  index  numbers  of  the  Department  of  Labor. 

When  the  trend  of  prices  changes,  wholesale  prices  are 
first  affected,  primarily  raw  materials  such  as  cotton,  wool, 
silk,  hides,  wheat,  coffee,  and  sugar.  Semi-finished  products 
and  finished  articles  follow  in  order.  Retail  prices  lag  behind. 
A  change  in  the  price  trend,  i.e.,  an  appreciable  advance  after 
a  continued  decline,  or  vice  versa,  in  any  of  the  raw  materials 
named,  is  always  significant  of  a  change  in  business  conditions. 

Under  normal  conditions,  commodity  prices  in  general  de- 
pend chiefly  upon  the  prices  of  farm  products  which  in  turn  de- 
pend upon  the  harvests. 


BAROMETERS  OF  MARKETING  117 


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118  BUSINESS  FORECASTING 

COMMODITY  SHIPMENTS 

Transportation  of  merchandise. — The  volume  of  merchan- 
dise which  is  being  transported  by  the  steam  railroads  of  the 
United  States  affords  a  serviceable  criterion  for  measuring 
business  activity.  Steamships  on  inland  waterways  and  coast- 
wise lines  carry  a  substantial  volume  of  freight,  but  the  great 
bulk  of  shipments  moves  by  rail.  The  most  satisfactory 
method  by  which  transportation  conditions  may  be  judged  is 
through  the  relationship  between  the  number  of  freight  cars 
available  and  the  number  in  use  at  any  given  time,  and 
through  the  number  of  freight  cars  which  are  being  loaded. 

Idle  cars. — The  number  of  idle  freight  cars  indicates  the 
relative  volume  of  commodity  shipments.  Freight  cars  are 
considered  to  be  "used"  when  they  are  actually  carrying  goods, 
or  in  the  process  of  loading  or  unloading.  The  cars  are  "idle" 
when  they  are  in  serviceable  condition  and  are  not  being  used. 
Cars  not  in  serviceable  condition  are  termed  "bad  order" 
cars.  The  number  of  idle  cars  naturally  increases  when  busi- 
ness is  comparatively  inactive  and  diminishes  when  conditions 
improve.  In  times  of  activity,  the  surplus  of  cars  is  occasionally 
eliminated  and  an  actual  shortage  develops. 

A  gradual  increase  in  the  number  of  idle  cars,  as  is  shown 
in  Table  No.  37  in  the  gain  from  17,058  in  January,  1913,  to 
241,802  in  June,  1914,  from  91,691  in  November,  1918, — 
the  armistice  month — to  473,080  in  the  following  March,  and 
from  a  shortage  of  124,226  in  August,  1920,  to  a  surplus  of 
30,022  in  the  following  December,  clearly  reflected  a  distinct 
slackening  in  business.  In  reverse  fashion,  a  gradual  decrease 
in  the  number  of  idle  cars,  as  is  shown  in  the  decline  from  a  sur- 
plus of  327,084  in  April,  1915,  to  a  shortage  of  138,102  in 
March,  1918,  and  from  a  surplus  of  473,080  in  March,  1919, 
to  a  shortage  of  124,226  in  August,  1920,  indicated  increasing 
activity. 

Idle  car  statistics  are  not  conclusive,  however,  as  changes  in 
the  number  of  bad  order  cars  affect  the  number  of  idle  cars  in- 
dependent of  traffic  conditions.  A  reduction  in  the  number  of 
idle  cars  may  be  largely  attributable  to  an  increase  in  the  num- 
ber of  bad  order  cars  as  was  the  case  in  May  of  1921  during 
which  month  the  number  of  bad  order  cars  increased  from 
309,971  to  341,337.  Moreover,  there  is  a  seasonal  variation 
in  the  volume  of  idle  equipment,  the  surplus  declining  from 
February  to  October  and  increasing  from  October  to  February. 


BAROMETERS  OF  MARKETING 


119 


120  BUSINESS  FORECASTING 

Car  loadings. — The  second  method  of  measuring  the  vol- 
ume of  commodity  shipments  is  through  the  number  of  freight 
cars  which  are  being  loaded  from  week  to  week.  Unfortu- 
nately this  information  has  been  compiled  but  for  a  short  time 
and  its  use  for  comparative  purposes  is  therefore  limited. 
Table  No.  38  shows  the  weekly  car  loadings  for  the  principal 
United  States  railroads  for  the  years  1919  and  1920.  The 
inactivity  which  prevailed  during  the  early  months  of  1919 
following  the  armistice  is  plainly  indicated  in  the  figures  for 
February  and  March  when  the  weekly  loadings  averaged  less 
than  700,000.    The  effect  of  the  new  crops  is  evidenced  in  the 

TABLE  No.  38.— WEEKLY  CAR  LOADINGS  OF  UNITED  STATES  RAIL- 
ROADS, 1919-1920* 

Week  Week 

ending  1920  1919  ending  1920  1919 

Jan.  7 830,000     723,000     July  1 839,000  743,000 

14 840,000     758,000         8 757,000  809,000 

21 804,000     734,000         15 923,000  902,000 

28 803,000     718,000         22 915,000  909,000 

25 914,000  914,000 

Feb.  4 762,000     692,000 

11 786,000     687,000     Aug.  5 942,000  872,000 

18 772,000     700,000         12 962,000  832,000 

25 783,000     666,000         19 964,000  913,000 

26 985,000  951,000 

Mar.  4 811,000     675,000 

11 819,000     701,000     Sept.  2 947,000  904,000 

18 855,000     699,000         9 872,000  946,000 

25 900,000     713,000         16 983,000  994,000 

23 994,000  987,000 

Apr.  1 858,000     688,000         30 975,000  957,000 

8 801,000     711,000 

15 601,000     706,000     Oct.  7 1,009,000  982,000 

22 717,000     715,000         14 1,005,000  972,000 

29 800,000     752,000         21 1,010,000  977,000 

28 973,000  935,000 

May  6 843,000     753,000 

13 843,000     739,000     Nov.  4 910,000  826,000 

20 862,000     777,000         11 919,000  808,000 

27 898,000     763,000         18 880,000  854,000 

25 797,000  739,000 

June  3 788,000     776,000 

10 878,000     807,000     Dec.  2 872,000  837,000 

17 869,000     807,000         9 834,000  761,000 

24 869,000     845,000         16 796,000  806,000 

23 639,000  684,000 

30 598,000  745,000 

•As  compiled  by  the  Car  Service  Division  of  the  American  Railway  Associa- 
tion and  reported  in  the  Railway  Age. 


BAROMETERS  OF  MARKETING  121 

comparatively  large  number  of  cars  which  are  loaded  during 
September,  October,  and  November  of  each  year. 

Commodity  shipments  as  business  barometers. — As  a  cri- 
terion for  judging  the  relative  activity  of  business,  the  volume 
of  commodity  shipments  serves  admirably.  But  an  analysis 
of  the  records  indicates  that  the  trend  follows  rather  than  pre- 
cedes changes  in  general  conditions.  Indications  that  busi- 
ness was  slowing  up  were  apparent  during  the  late  spring  and 
early  summer  months  of  1920;  yet  car  loadings  continued  to 
increase  until  late  fall  and  it  was  at  the  very  end  of  the  year 
before  an  appreciable  decline  ensued. 

An  excellent  feature  of  the  reports  on  both  idle  cars  and 
car  loadings,  however,  is  the  promptness  with  which  the  in- 
formation is  made  available.  The  figures  are  compiled  weekly 
by  the  car  service  division  of  the  American  Railway  Associa- 
tion and  are  published  within  two  weeks  from  the  time  to 
which  the  figures  apply.  This  only  partly  offsets  the  major 
disadvantage  of  studying  an  index  which  follows  rather  than 
precedes  the  general  trend.5 

FOREIGN   TRADE 

New  conditions  in  foreign  trade. — The  European  war  ex- 
erted a  profound  influence  upon  foreign  trade,  not  only  of  the 

*  Unfortunately  few  publications  {Railway  Age  is  a  notable  exception)  reprint 
the  weekly  freight  car  loading  statistics  completely.  The  complete  weekly  report 
gives  loadings  according  to  geographical  districts  and  commodities  handled  for 
the  current  and  preceding  year.  The  report  for  the  week  of  May  28,  1921, 
divided  total  car  loadings  of  787,237  as  follows: 

Commodities  IQ2I  IQ20  Jqiq 

Grain  and  grain  products 46,337  33,038  35,523 

Livestock 27,518  28,677  28,624 

Coal 164,870  174,612  153,642 

Coke  5,605  11,680            

Forest  products 50,277  62,247  60,545 

Ore  28,673  69,426  54,247 

Merchandise    215,095  150,595            

Miscellaneous   248,862  367,932  431,180 

Total    787,237  898,207  763,761 

An  analysis  of  this  nature  is  obviously  of  greater  barometric  value  than  the 
simple  statement  of  the  total  cars  loaded  each  week.  Until  such  time  as  the 
periodicals  deem  it  advisable  to  print  such  a  detailed  analysis,  it  would  be  well 
to  procure  a  copy  of  the  weekly  statement  direct  from  the  Car  Service  Division 
of  the  American  Railway  Association  at  Washington,  D.  C. 


122  BUSINESS  FORECASTING 

United  States  but  of  all  other  countries  as  well.  Total  United 
States  exports  grew  from  $2,484,000,000  in  1913  to  $8,228,- 
000,000  in  1920;  and  imports  increased  from  $1,792,000,000 
to  $5,279,000,000  in  the  same  period.  The  excess  of  exports 
over  imports  in  the  trade  of  the  United  States  with  Europe 
amounted  to  almost  $20,000,000,000  in  the  period  from  Jan- 
uary 1,  1915,  to  December  31,  1920.  The  increases  were  due 
to  a  high  level  of  prices  more  than  to  a  gain  in  the  volume  of 
trade,  however. 

The  unusual  conditions  which  attended  foreign  trade  dur- 
ing and  following  the  war  militate  against  the  use  of  the  figures 
in  the  customary  way  for  barometric  purposes.  But  even 
greater  significance  than  ever  before  is  to  be  found  in  current 
trade  analysis. 

Foreign  trade  of  the  United  States. — The  foreign  trade 
of  the  United  States  for  the  period  from  1867  to  1920  is 
shown  in  Table  No.  39.  Prior  to  the  outbreak  of  the  World 
War  in  1914  a  situation  existed  materially  different  from 
that  which  has  developed  since  that  time.  Exports  exceeded 
imports  by  a  fair  margin  from  year  to  year,  but  invisible  deb- 
its against  this  country,  notably  interest  charges  on  foreign 
capital  invested  in  the  United  States,  offset  the  American  trade 
credit  balance  and  made  total  debits  and  credits  practically 
equal.6  In  the  six-year  period  from  1915  to  1920  inclusive, 
however,  total  exports  exceeded  total  imports  by  no  less  than 
$18,230,000,000.  Furthermore,  the  annual  excess  of  invisible 
debit  items  over  credit  items  which  formerly  averaged  $500,- 
000,000,  has  been  converted  into  an  excess  of  credit  items  ap- 
proximating more  than  $100,000,000  yearly  and  probably 
closer  to  $300,000,000/     The  difficulty  in  arranging  for  the 

'During  the  fifteen  years  immediately  preceding  the  European  War,  the  aver- 
age excess  of  merchandise  exports  over  imports  was  about  $500,000,000.  During 
the  same  period  invisible  debit  items  approximated  the  same  figures  as  is  shown 
in  the  appended  tabulation: 

Interest  on  investments  in  United  States $175,000,000 

Shipping  charges 25,000,000 

Remittances  by  foreign  nationals  in  United  States 125,000,000 

Expenditures  of  American  tourists  abroad 1 50,000,000 

Insurance  and  miscellaneous 25,000,000 

Total    $500,000,000 

"War  Costs  and  Their  Financing,"  E.  L.  Bogart,  p.  72. 

'The  largest  single  item  of  invisible  trade  is  interest  charges.  American  in- 
vestments abroad  now  exceed  $15,000,000,000  which  alone  creates  an  interest 
credit  of  about  $750,000,000  annually  to  the  United  States.  "The  Chase  Economic 
Bulletin,"  vol.  I,  No.  1,  p.  3. 


BAROMETERS  OF  MARKETING 


123 


TABLE  No.  39.— FOREIGN  TRADE  OF 
(in  millions  of 

Year  Imports 

1867 371 

1868 368 

1869 ! 438 

1870 461 

1871 573 

1872 655 

1873 595 

1874 562 

1875 503 

1876 427 

1877 480 

1878 431 

1879 513 

1880 696 

1881 670 

1882 752 

1883 687 

1884 629 

1885 587 

1886 663 

1887 708 

1888 725 

1889 770 

1890 823 

1891 828 

1892 840 

1893 776 

1894 676 

1895 801 

1896 681 

1897 742 

1898 634 

1899 798 

1900 829 

1901 880 

1902 969 

1903 995 

1904 1,035 

1905 1,179 

1906 1,320 

1907 1,423 

1908 1,116 

1909 1,475 

1910 1,562 

1911 1,532 

1912 1,818 

1913 1,792 

1914 1,789 

1915 1,778 

1916 2,391 

1917 2,952 

1918 3,031 

1919 3,904 

1920 5,279 


THE  UNITED  STATES,  1867-1920 

dollars) 

Excess  of        Excess  of 

Exports 

exports           imports 

310 

61 

281 

86 

337 

101 

403 

57 

460 

112 

468 

187 

567 

27 

569 

7 

510 

7 

590 

163 

620 

139 

737 

305 

765 

251 

889 

192 

833 

163 

767 

15 

795 

108 

749 

120 

688 

100 

713 

49 

715 

6 

691 

.... 

33 

727 

56 

857 

34 

970 

142 

938 

97 

875 

99 

825 

148 

824 

23 

1,005 

324 

1,099 

357 

1,255 

620 

1,275 

476 

1,477 

648 

1,465 

584 

1,360 

391 

1,484 

489 

1,451 

415 

1,626 

447 

1,798 

477 

1,923 

500 

1,752 

636 

1,728 

252 

1,866 

303 

2,092 

560 

. . . 

2,399 

581 

2,484 

691 

3,113 

324 

3,554 

1,776 

5,482 

3,091 

6,233 

3,281 

6,149 

3,117 

7,920 

4,016 

8,228 

2,949 

. 

124 


BUSINESS  FORECASTING 


BAROMETERS  OF  MARKETING 


US 


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O  ZQ 

126  BUSINESS  FORECASTING 

payment  of  American  credits  abroad  has  proved  a  potent  con- 
tributing factor  to  the  economic  impasse  which  has  followed 
the  termination  of  the  war. 

The  detailed  monthly  summary  of  foreign  trade  for  the 
period  from  1911  to  1920  inclusive  is  shown  in  Tables  No. 
40  and  No.  44,  which  give  respectively  merchandise  exports  and 
imports.  The  gain  in  trade  from  1915  to  1920  was  not  so 
great  as  appears  on  the  surface.  The  general  increase  in  price 
levels  caused  the  value  of  the  shipments  to  advance  without 
a  corresponding  change  in  the  volume. 

Export  and  import  figures  have  not  proved  an  exception- 
ally good  barometer  of  domestic  business  conditions.  As  is 
shown  in  Table  No.  40,  the  value  of  exports  for  the  last  six 
months  of  1920  was  substantially  greater  than  in  the  corre- 
sponding period  of  1919  despite  the  fact  that  business  condi- 

TABLE  No.  41.— FOREIGN  TRADE  OF  THE  UNITED  STATES  BY 
GRAND  DIVISIONS,  1913  AND  1920* 

1913  *92<> 

EUROPE 

Exports     $1,499,000,000  $4,466,000,000 

Imports    864,000,000  1,227,000,000 

Excess  of  exports $635,000,000  $3,239,000,000 

NORTH    AMERICA 

Exports     $601,000,000  $1,929,000,000 

Imports     389,000,000  1,663,000,000 

Excess  of  exports $212,000,000  $266,000,000 

SOUTH    AMERICA 

Imports    $198,000,000  $761,000,000 

Exports     146,000,000  623,000,000 

Excess  of  imports $52,000,000  $138,000,000 

ASIA  AND  OCEANIA 

Imports    $316,000,000  $1,476,000,000 

Exports     207,000,000  1,043,000,000 

Excess  of  imports $109,000,000  $433,000,000 

AFRICA 

Exports    $28,000,000  $165,000,000 

Imports     23,000,000  150,000,000 

Excess  of  exports $5,000,000  $15,000,000 

•Compiled  from  "Monthly  Summary  of  the  Foreign  Commerce  of  the  United 
States,"  December,  1920,  p.  7. 


BAROMETERS  OF  MARKETING 


127 


tions  were  much  better  in  1919.     Exports  did  not  fall  off  until 

February  of  1921,  almost  an  entire  year  after  the  downward 
trend  had  begun. 

TABLE  No.  42.— LEADING  EXPORTS  OF  THE  UNITED  STATES,  VALUES 

AND  RANKING,  1918-1919-1920* 

(in  millions  of  dollars) 

IQ20  igig  iq/8 

Article                               Value       Rank  Value  Rank       Value  Rank 

Cotton    (raw)     1,136           1  1,137  2  674  5 

Iron  and  steel    (mfrs.)    ....     1,112           2  968  3  1,035  1 

Breadstuffs    1,079           3  920  4  801  3 

Oils  608           4  444  6  373  6 

Meat  and  dairy  products...       544           5  1,160  1  941  2 

Cotton   (manufactured)    402           6  273  8  181  9 

Coal    349           7  119  14  107  11 

Automobiles 298           8  151  9  96  12 

Tobacco  274           9  513  5  795  4 

Leather 190         10  303  7  91  13 

Wood    186         11  136  10  87  14 

Copper   133         12  121  13  200  8 

Chemicals    168         13  133  11  165  10 

Electrical  machinery   101         14  89  17  59  15 

Sugar    '. 95         15  114  15  27  21 

Paper    89         16  86  18  54  17 

Rubber   (mfrs.)    85         17  53  19  31  20 

Cars   (excl.  autos)    84         18  110  16  55  16 

Fruits  and  nuts 84         19  126  12  32  18 

Explosives   56         20  28  23  243  7 

Agricultural  implements  ...         46         21  41  21  32  19 

Wool   44        22  47  20  19  22 

Fertilizer    36         23  20  25  4 

Naval  stores 34         24  31  22  10 

Furs    32         25  23  24  11 

♦Compiled   from   "Monthly  Summary   of   Foreign  Commerce   of  the  United 
States,  December,  1920." 


Merchandise  exports. — In  studying  commodity  exports 
from  month  to  month,  allowance  must  be  made  for  seasonal 
tendencies.  Exports  are  usually  at  their  peak  during  the  fall 
months  owing  to  the  movement  of  American  crops  abroad. 
As  is  shown  in  Table  No.  41,  Europe  is  the  best  customer  of 
American  producers  as  exports  to  that  Grand  Division  exceed 
in  value  the  aggregate  to  all  other  continents.  This  indicates 
clearly  the  effect  of  European  conditions  upon  the  United 
States. 


128  BUSINESS  FORECASTING 

The  relative  importance  of  the  commodities  which  are  af- 
fected by  changing  conditions  in  foreign  trade  is  shown  in 
Table  No.  42  which  gives  the  value  and  ranking  of  the  prin- 
cipal articles  of  American  exportation.  Raw  cotton,  iron  and 
steel  manufactures,  breadstuffs,  oils,  and  meat  and  dairy  prod- 
ucts, comprise  over  50  per  cent  of  the  total  exports  in  value. 

The  exports  which  are  of  greatest  significance  from  the 
standpoint  of  industrial  activity  are  those  of  manufactured 
products.  Not  only  is  the  margin  of  profit  greater  on  this 
class,  but  the  production  affords  employment  at  high  wages 
to  American  labor.  Table  No.  43  shows  the  relationship  be- 
tween the  value  of  manufactured  products  exported  and  total 
exports  for  the  calendar  years  1910  to  1920.  The  value  of 
manufactured  products  for  the  period  averaged  67.08  per  cent, 
or  slightly  more  than  two-thirds  of  the  total. 

TABLE  No.  43.— EXPORTS  OF  MANUFACTURED  PRODUCTS  IN  THE 
UNITED  STATES,  1910-1920* 

Total  domestic  Percentage  of 

Year  exports  Manufactures         manufactures 

1910 $1,829,022,000  $1,083,680,000  59.27 

1911 2,058,413,000  1,275,062,000  61.94 

1912 2,362,696,000  1,426,556,000  60.38 

1913 2,448,284,000  1,501,721,000  61.34 

1914 2,071,057,000  1,282,744,000  61.94 

1915 3,493,230,000  2,341,366,000  67.03 

1916 5,422,642,000  4,185,663,000  77.20 

1917 6,169,617,000  4,827,027,000  78.26 

1918 6,047,874,000  4,528,331,000  74.88 

1919 7,749,815,000  5,448,366,000  70.30 

1920 8,080,480,000  5,280,252,000  65.34 


* 


Compiled  from  "Statistical  Abstract  of  the  United  States,"  1920,  p.  474. 


Effect  upon  domestic  industry. — The  relationship  of  for- 
eign trade  to  domestic  industry  can  be  established  by  compar- 
ing the  value  of  manufactured  products  exported  to  the  total 
value  of  domestic  manufactures  as  reported  by  the  special  cen- 
suses taken  in  1899,  1904,  1909,  1914,  and  1919.  The  total 
value  of  manufactures  in  1899  was  $11,406,927,000  and  the 
value  of  manufactures  exported  was  $685,141,000  or  6.0 
per  cent.  In  1904,  the  total  value  was  $14,793,903,000  and 
exports  were  $832,447,000  or  5.6  per  cent.  In  1909,  the 
total  value  was  $20,672,051,000  and  exports  were  $973,971- 
000  or  4.7  per  cent.  In  1914,  the  total  value  was  $24,246,- 
434,000  and  exports  were  $1,282,744,000  or  5.3  per  cent.    In 


BAROMETERS  OF  MARKETING 


129 


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BUSINESS  FORECASTING 


1919,  the  total  value  was  $62,588,905,000  and  exports  were 
$5,448,366,000  or  8.7  per  cent.8  The  effect  of  changes  in 
foreign  demand  for  American  manufactures  upon  domestic 
industry  is  apparently  less  important  than  is  currently  believed 
since  the  total  exports  average  only  about  5  per  cent  of  the 
total  productivity. 

Merchandise  imports. — A  monthly  summary  of  the  mer- 
chandise imports  of  the  United  States  for  the  period  from 

TABLE  No.  45.— LEADING  IMPORTS  OF  THE  UNITED  STATES,  VALUES 

AND  RANKING,  1918-1919-1920* 

(in  millions  of  dollars) 

lQ2o  igig  jqi8 

Article  Value       Rank        Value       Rank       Value       Rank 

Sugar    1,017  1  394  2  242  2 

Silk   376  2  395  1  221  4 

Cotton     275  3  123  10  81  13 

Coffee    252  4  261  4  99  9 

Rubber   248  5  221  6  149  6 

Hides  and  skins 243  6  306  3  108  8 

Fibers 234  7  176  7  226  3 

Chemicals    211  8  126  9  168  5 

Wood    209  9  111  11  98  10 

Wool     184  10  235  5  273  1 

Oils   181  11  164  8  140  7 

Breadstuffs    125  12  50  22  66  15 

Fruits  and  nuts    116  13  95  13  74  14 

Seeds   102  14  69  16  45  18 

Tobacco    97  15  86  14  60  17 

Paper    84  16  53  20  42  19 

Furs    84  17  69  15  32  21 

Precious   stones    . . .' 75  18  105  12  24  25 

Tin    73  19  50  21  93  12 

Copper    67  20  62  17  97  11 

Meat  products   64  21  37  24  61         16 

Cocoa   54  22  57  19  37        20 

Fertilizer    51  23  11  ..  4 

Iron   and  steel    50  24  26  ..  24 

Vegetables  40  25  40  23  32        22 

*  Compiled  from  "Monthly  Summary  of  Foreign  Commerce  of  the  United 
States,"  December,  1920. 

8  Value  of  manufactures  in  1899,  1904,  1909,  and  1914  from  "Statistical  Ab- 
stract of  the  United  States,"  1920,  p.  192;  in  1919  from  Preliminary  Statement 
of  Department  of  Commerce,  May  24,  1921.  Value  of  manufactures  exported 
from  "Statistical  Abstract  of  the  United  States,"  1920,  p.  784.  The  slight  dis- 
crepancy with  Table  No.  43  is  due  to  differences  in  fiscal  and  calendar  years. 


BAROMETERS  OF  MARKETING  131 

1911  to  1920  is  shown  in  Table  No.  44.  Interpretation  of 
the  figures  of  trade  since  1915  are  subject  to  the  same  qualifi- 
cation as  in  the  case  of  exports :  high  price  levels  cause  the 
totals  to  increase  without  a  corresponding  increase  in  the  vol- 
ume. The  principal  articles  of  importation,  with  value  and 
ranking,  are  shown  in  Table  No.  45.  Reference  has  been 
made  in  the  preceding  chapter  to  the  volume  of  imports  of 
raw  materials  in  connection  with  the  measurement  of  produc- 
tive activity.  The  importation  of  articles  of  luxury,  such  as 
silk,  furs,  and  precious  stones,  affords  a  criterion  for  judging 
the  purchasing  power  of  the  country,  as  was  evidenced  in  the 
increase  of  300  per  cent  in  the  value  of  precious  stones  im- 
ported in  1919  over  1918. 

Under  post-war  conditions,  merchandise  imports  are  of  par- 
ticular significance  as  a  criterion  of  conditions  abroad.  In- 
ternational debts  are  paid  in  merchandise;  gold  is  used  only 
when  production  is  deficient.  As  Europe  is  the  chief  debtor  of 
the  United  States,  a  study  of  the  volume  of  imports  received 
from  the  continent  from  month  to  month  affords  a  means  of 
determining  the  extent  of  economic  recovery  that  is  develop- 
ing. 

Balance  of  trade. — The  difference  between  the  total  value 
of  merchandise  exports  and  imports  is  known  as  the  balance 
of  trade.  In  addition  to  the  annual  trade  balance  of  the 
United  States  which  appears  in  Table  No.  39,  a  detailed  state- 
ment of  the  balances  by  months  during  the  period  from  1911 
to  1920  is  given  in  Table  No.  46.  While  it  would  be  im- 
practicable to  expect  that  total  exports  and  total  imports  should 
always  be  equal,  yet  there  is  no  gainsaying  the  fact  that  a  large 
excess  on  either  side  creates  an  unsatisfactory  position.  Ex- 
ports can  only  be  paid  in  imports,  and  it  is  economic  folly 
for  one  nation  to  sell  abroad  unless  it  is  also  willing  to  buy 
abroad.  The  enormous  favorable  trade  balance  of  $19,933,- 
000,000  which  arose  during  the  period  from  1915  to  1920  in 
the  commerce  between  Europe  and  the  United  States  has 
created  a  most  difficult  economic  problem. 

Foreign  trade  as  a  business  barometer. — The  influence  of 
foreign  trade  upon  domestic  conditions  has  been  overempha- 
sized. Although  manufactured  articles  comprise  two-thirds 
of  the  total  value  of  American  exports,  the  amount  represents 
but  5  per  cent  of  the  total  value  of  United  States  manufac- 


132 


BUSINESS  FORECASTING 


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BAROMETERS  OF  MARKETING  133 

tures.  Moreover,  a  drop  in  exports  usually  comes  after  a 
period  of  depression  has  started,  as  was  illustrated  in  1920 
and  1921  when  exports  did  not  start  to  decrease  until  almost 
one  year  after  business  started  to  slacken.  The  volume  of 
imports  has  the  greatest  significance  as  it  reflects  the  domes- 
tic demand  for  raw  materials  for  production  as  well  as  the 
extent  of  economic  recovery  in  the  belligerent  nations  of  Eu- 
rope. Large  exports  require  large  imports,  and  favorable  trade 
balances,  i.e.,  excess  of  exports,  must  be  followed  by  unfavor- 
able balances,  i.e.,  excess  of  imports,  if  payment  is  to  be  even- 
tually consummated.  The  payment  of  Europe's  indebtedness 
to  the  United  States  will  require  that  this  country  import  mer- 
chandise during  the  coming  years  at  a  greater  rate  than  ex- 
ports are  sent  abroad.  A  favorable  balance  of  $3,329,000,- 
000  in  1920  must  be  converted  either  through  increased  im- 
ports or  decreased  exports,  or  both,  into  an  unfavorable  bal- 
ance for  a  prolonged  period.9 


RETAIL    SALES 

Retail  sales  represent  current  purchasing  power. — The 
proportion  of  the  total  expenditures  of  the  average  American 
family  which  is  made  in  the  retail  stores  is  approximately  75 

'The  "Federal  Reserve  Bulletin"  each  month  prepares  a  representative  table 
of  exports  and  imports  of  the  United  States  comparing  prewar  and  postwar 
totals  with  the  price  change  eliminated.  On  this  basis,  the  index  numbers  for 
1913,  1919,  and  1920  were  as  follows: 


EXPORTS 

Raw  Producers' 

Year  materials  goods 

1913 100.0  100.0 

1919 88.9  154.7 

1920 92.2  142.6 


Consumers' 

Grand  total 

goods 

exports 

100.0 

100.0 

188.5 

118.6 

137.9 

107.7 

IMPORTS 

Ra<w 

Producers' 

C 

onsumers' 

Grand  total 

Year 

materials 

goods 

goods 

imports 

1913 

100.0 

100.0 

100.0 

100.0 

1919 

157.5 

193.0 
227.3 

161.4 
155.4 

171.1 

1920 

135.2 

171.7 

134  BUSINESS  FORECASTING 

per  cent.10  Retail  purchases  represent  the  purchasing  power 
of  the  people  which  in  turn  represents  their  earning  power  or 
productivity.  Experience  has  shown  that  increased  produc- 
tion gives  an  increased  command  over  the  articles  of  produc- 
tion which  is  utilized  almost  immediately.  Saving,  unfor- 
tunately, is  a  negligible  factor  when  income  increases.  The 
volume  of  retail  sales,  therefore,  affords  a  criterion  for  judg- 
ing the  general  prosperity  of  the  people. 

The  volume  of  sales. — The  compilation  of  representa- 
tive figures  which  would  cover  sales  in  the  retail  field  involves 
many  difficulties.  The  number  of  retail  stores  in  the  United 
States  runs  far  into  the  thousands  and  the  value  of  sales  ranges 
from  a  few  hundred  to  many  million  dollars  annually.  Until 
recently,  no  systematic  attempt  was  made  to  collect  retail  sales 
statistics  and  accordingly  changes  in  the  past  have  been  discus- 
sed in  a  general  manner.  The  sales  of  the  large  mail  order 
houses,  such  as  Sears,  Roebuck  and  Company,  Montgomery, 
Ward  and  Co.,  and  the  National  Cloak  and  Suit  Company, 
and  the  sales  of  the  chain  stores,  such  as  F.  W.  Woolworth 
Company,  and  of  certain  department  stores,  such  as  The 
May  Department  Stores  Company,  were  accepted  as  the  best 
indicia  of  retail  conditions. 

The  Federal  Reserve  statement  of  retail  sales. — The  Fed- 
eral Reserve  Board  began  to  compile  statistics  of  retail  sales 
in  1919.  The  larger  department  stores  in  each  of  the  twelve 
districts  were  requested  to  submit  monthly  statements  of  the 
volume  of  sales  either  in  dollars  or  on  a  percentage  basis  in 
comparison  with  the  corresponding  period  during  the  previous 

10 The  average  expenditures  of  an  American  family  are  estimated  as  follows: 

Per  cent 

Food  38.2 

Clothing    16.6 

Housing    13.4 

Fuel  and  light 5.3 

Furniture  and  furnishings   5.1 

Miscellaneous    21.3 

Total    100.0 

— From  the  Monthly  Labor  Review,  vol.  XII,  No.  2,  p.  61. 


BAROMETERS  OF  MARKETING  135 

TABLE  No.  47.— CONDITION  OF  RETAIL  TRADE  ACCORDING  TO 

FEDERAL  RESERVE  DISTRICTS* 

(Percentage  of  increase) 


Dist. 
and  year. 

Jan. 

i 
Feb. 

Mar. 

Apr. 

May 

June 

July 

Aug. 

Sept 

.   Oct. 

Nov 

Dec. 

1.  Boston 
1921.... 

1.5 
34.  J 

6.5 

18.5 

1.5 

37.5 

— l.S 

18.5 

—4.5 

20.7 

—3.1 

28. C 

—12.: 

19. S 

—4.5 
10. S 

1920... . 

15.4 

.t 

11.4 

—  .4 

2.  New  1 
1921.... 

ork: 

—5.3 
t 

l.C 

t 

—4.6 
64.8 

—  .5 
15.  8 

— 10. C 

35.4 

—7.1 

28.4 

—11.5 

24.4 

—5.2 
15. S 

1920.... 

3.6 

6.2 

11.6 

—1.6 

3.  Philade 
1921.. .. 

lphia: 
3.1 

22.2 

3.8 
17  I 

1.8 

37.5 

—  .4 
12.4 

—7.8 
50.7 

—7.3 
34.3 

—11.8 

23.8 

— 4.C 
22.6 

1920.... 

15.2 

15.8 

8.5 

6.1 

4.   Clevela 
1921... 

nd: 

3.6 
t 

6.4 
28.6 

—  .4 

45.5 

.8 
18.4 

—5.5 
31.3 

—14.1 

31.5 

—21.4 
29.9 

—21.0 

25.7 

1920.... 

24.6 

20.8 

26.1 

14.7 

5.  Richmo 
1921. ... 

nd: 
5.4 
t 

8.6 
14.2 

2.7 
23.1 

—  .7 
.9 

—3.0 
110 

—4.2 
21.4 

—11.7 

15.7 

—9.8 
20.9 

1920.... 

7.5 

12.4 

13.1 

4.9 

6.  Atlanta 
1921.. .. 

—9.0 
t 

1.4 

t 

—5.6 
27.4 

—19.5 
23.4 

— 16.8 
31.0 

—17.0 
24.3 

—21.2 
11.6 

—21.3 

27.6 

1920 

12.6 

25.1 

14.6 

3.0 

7.  Chicago 
1921.... 

—10.5 
48.2 

—5.4 
51.7 

—3.2 
65.2 

—3.1 
33.3 

—12.5 
49.7 

—17.3 
59.6 

—14.7 
41.2 

—18.8 
33.2 

1920.... 

28.6 

8.3 

17.6 

9.6 

8.  St.  Lou 
1921.... 

is: 

—3.8 
t 

—3.1 

t 

—  .7 
t 

—2.9 
t 

—1.6 
t 

—7.9 
t 

—16.5 
t 

—11.7 

20.8 

1920. .  . . 

11.8 

10.5 

10.8 

5.3 

9.  Minnea 
1921.... 

polis: 

—12.3 

t 

—7.0 
t 

—11.2 
t 

—5.4 
17.0 

—14.9 

4.3 

—16.8 
11 .8 

—21.8 
11 .6 

—11.0 
8.8 

1920.... 

.3 

—2.9 

2.9 

.5 

10.   Kansa 
1921.... 

s  City: 
-11.6 

t 

4.1 

t 

—6.1 

24.6 

— 2.8 

19.6 

—5.3 
10.9 

— 10.8 

12.9 

— 10.9 
14. 1 

—8.9 
9.9 

1920.... 

7.8 

-1.9 

9.2 

-5.1 

11.   Dallas 
1921.... 

—8.9 
t 

—4.6 
t 

-16.0 
t 

-17.7 
t 

-17.4 
t 

-17.4 

t 

— 22. 1 

25.9 

-23.3 
25.6 

1920.... 

12.4 

16.0 

12.7- 

-2.9 

12.  San   F 
1921 - 

•ancisc 

-14.3 

51.7 

3: 

—2.4 
31.1 

—  .6 
37.8 

—9.3 
13.8 

—4.1 

31.2 

—7.8- 
27.8 

-12.9 
21.2 

—6.2 
21.7 

1920.... 

14.5 

8.2 

11.3- 

-4.3 

United  Stan 

es:t 

X 

t 

—4.2 

—8.6- 

-10.7- 

-15.1—11.9 

•Compiled  from  the  "Federal  Reserve  Bulletin." 

t  Information  not  available  in  certain  districts  prior  to  August,  1920. 

X  Not  compiled  previous  to  April,  1921. 


136  BUSINESS  FORECASTING 

year.11  As  is  shown  in  Table  No.  47,  the  first  month  for  which 
figures  were  secured  for  the  entire  country  was  August,  1920. 

As  the  Federal  Reserve  statement  is  based  upon  the  vol- 
ume of  sales  in  dollars  rather  than  in  units  of  merchandise, 
consideration  must  be  given  to  changes  in  the  level  of  prices 
in  an  analysis  of  the  statement.  Retail  sales  in  District  No. 
2  in  December,  1920,  were  reported  as  1.6  per  cent  less  than 
in  December,  1919.  Retail  prices,  however,  had  declined  to 
a  greater  extent12  and  the  quantity  of  merchandise  sold  in  the 
former  month  really  exceeded  that  in  the  latter  although  the 
money  value  was  less. 

Retail  sales  as  a  business  barometer. — The  statistics  avail- 
able are  too  meager  to  justify  a  conclusive  opinion  as  to  the 
value  of  retail  sales  for  barometric  purposes.  Retail  sales  in 
April,  1920,  showed  a  marked  falling-off  in  comparison  with 
the  trend  of  the  preceding  months  and  it  is  significant  that  it 
was  about  this  time  that  business  conditions  started  to  become 
adverse.  Yet  the  recovery  in  sales  during  the  remainder  of 
the  year  indicated  a  condition  of  affairs  which  was  quite  con- 
trary to  that  which  actually  transpired.  The  volume  of  re- 
tail sales  during  the  first  four  months  of  1921  in  comparison 
with  that  for  the  same  period  of  1920  did  not  reflect  the  de- 
gree of  unemployment,  of  lower  wage  scales,  and  reduced 
purchasing  power  which  prevailed  in  1921.  It  would  appear 
from  the  evidence  available  that  the  trend  of  retail  sales  fol- 
lows well  after  the  trend  in  business  conditions. 

"The  number  of  stores  which  reported  sales  for  April,  1921,  was  as  follows: 

Number 
District  °f stores 

1.  Boston    24 

2.  New  York 42 

3.  Philadelphia     47 

4.  Cleveland    15 

5.  Richmond    25 

6.  Atlanta    19 

7.  Chicago    20 

8.  St.  Louis   ll 

9.  Minneapolis   " 

10.  Kansas  City 15 

11.  Dallas    19 

12.  San  Francisco   29 

Total  283 

"The  index  number  of  retail  food  prices  in  the  United  States  in  December, 
1920,  was  178— a  decline  of  9.6  per  cent  from  the  index  number  of  197  in 
December,  1919.— Monthly  Labor  Review,  vol.  XII,  No.  2,  p.  21. 


Chapter  VIII 

BAROMETERS  OF  LABOR  CONDITIONS 

Labor  conditions  barometrics. — Closely  allied  with  statis- 
tics of  production  and  marketing  are  those  which  reflect  the 
conditions  of  labor.  Labor  in  this  sense  requires  a  broad  in- 
terpretation as  it  embraces  all  who  work  in  the  service  of 
others  for  a  fixed  compensation.  The  problem  of  labor — for 
labor  conditions  seem  destined  always  to  remain  the  major 
problem  in  economics  and  to  be  at  the  heart  of  all  the  great 
controversies  of  the  world — is  one  of  employment  and  wages. 
That  man  must  work  is  inevitable,  and  such  being  the  case, 
the  conditions  under  which  he  makes  his  living  have  a  close 
association  with  the  trend  of  economic  development. 

Obviously  labor  conditions  can  not  be  satisfactorily  meas- 
ured with  statistical  standards.  The  relative  degree  of  con- 
tentment with  which  labor  performs  its  allotted  tasks,  for  in- 
stance, would  require  a  psychological  rather  than  a  statistical 
unit  of  measurement.  Wages  are  never  adequately  expressed 
in  dollars.  The  number  of  unemployed  reflects  poorly  the 
amount  of  unemployment.  The  total  number  of  strikes  and 
lockouts,  however,  has  a  deeper  significance  than  a  surface 
analysis  might  indicate.  Imperfect  though  the  units  of  meas- 
urement are,  labor  conditions  afford  an  opportunity  for  bar- 
ometric study  which,  although  not  indispensable,  has  consider- 
able value. 

EMPLOYMENT 

The  problem  of  employment. — The  number  of  persons  en- 
gaged in  gainful  occupations  in  the  United  States  in  1910  was 
38,167,000  of  which  number  8,075,772  were  female.1  As  the 
employment  difficulties  in  agriculture  concern  a  shortage 
rather  than  a  surplus  of  workers,  the  number  engaged  directly 
in  that  occupation  should  be  deducted  from  the  aggregate. 

1  "Statistical  Abstract  of  the  United  States,"  1920,  p.  283. 

137 


138  BUSINESS  FORECASTING 

The  number  directly  engaged  in  agriculture  in  1910  was 
12,659,203  which  would  leave  a  remainder  of  25,507,797 
engaged  in  industry.2  Similar  figures  from  the  1920  census 
have  not  been  issued  up  to  the  time  of  writing,  but  may  be 
estimated  by  adding  to  the  number  of  industrial  workers  in 
1910  a  number  equivalent  to  the  percentage  of  gain  in  the 
total  population  during  the  period  from  1910  to  1920. 3  This 
would  indicate  that  the  number  of  industrial  workers  in 
the  United  States  in  1920  was  between  29,000,000  and 
30,000,000. 

Under  the  assumption  that  normal  conditions  of  employ- 
ment would  provide  full-time  employment  for  all  workers,  the 
effect  of  a  decrease  in  working  opportunity  upon  conditions 
of  employment  is  readily  discernible.4  A  decrease  of  5  per 
cent  in  production  is  equivalent  to  unemployment  for  1,500,- 
000  persons;  a  decrease  of  10  per  cent  means  unemployment 
for  3,000,000;  and  a  decrease  of  15  per  cent  works  out  the 
same  as  entire  unemployment  for  4,500,000  workers. 

In  a  nation  where  a  change  of  1  per  cent  in  the  desired  pro- 
ductivity means  employment  or  unemployment  for  nearly 
300,000  workers,  the  problem  of  employment  is  decidedly 
serious. 

Effect  of  changing  business  conditions  upon  employment. 
— Just  as  stable  business  conditions  bespeak  steady  employ- 
ment, so  changing  conditions  result  in  fluctuating  periods  of 
employment.  In  view  of  the  serious  effect  upon  labor  of 
slight  changes  in  production,  as  shown  in  the  preceding  para- 
graph, small  wonder  may  be  felt  that  large  changes  have  such 
drastic  results. 

Outside  of  the  compilations  made  at  the  decennial  censuses, 
no  official  or  scientific  attempt  is  made  to  compile  records  of 
the  total  number  of  workers,  employed  or  unemployed,  in  the 
United  States.  Under  recent  practice,  however,  the  Bureau 
of  Labor  Statistics  of  the  Department  of  Labor  is  compiling 
a  monthly  list  of  the  number  of  workers  at  various  plants  in 

3  "Statistical  Abstract  of  the  United  States,"  1920,  p.  798. 

"The  percentage  of  population  gain  during  the  decade  from  1910  to  1920  was 
14.9.  The  application  of  this  percentage  to  the  number  of  industrial  workers 
in  1910 — 25,507,797 — would  give  an  approximate  gain  of  3,800,661. 

4  It  is  fully  appreciated  that  "normal"  conditions  in  the  United  States — as 
existed  in  1912  for  instance — do  not  signify  full-time  employment  for  all 
workers.  From  an  employment  standpoint,  however,  conditions  are  normal  only 
when  all  workers  are  operating  on  full-time. 


BAROMETERS  OF  LABOR  CONDITIONS     139 

TABLE   No.   48.— COMPARISON   OF   EMPLOYMENT  IN   IDENTICAL 

ESTABLISHMENTS   IN    FEBRUARY,   1921,   IN   COMPARISON 

WITH  JANUARY,  1921,  AND  FEBRUARY,  1920* 

February,  I921  February,  1921 

co  m pared  <with  co  m pared  ivith 

Industry                                                      January,  IQ2I  February,  1920 

Per  cent  Per  cent 

Iron  and  steel 4-0.8  — 24.2 

Automobile  manufacturing -4-  1.3  — 41.3 

Car  building  and  repairing — 12.8  — 16.6 

Cotton  manufacturing    +  17.8  —  0.1 

Cotton  finishing   +12.9  — 16.0 

Hosiery  and  underwear +20.8  — 44.2 

Woolen +42.0  —35.1 

Silk   +  3.9  —21.0 

Men's  ready-made  clothing   +21.1  — 26.6 

Leather  manufacturing   +0.2  — 36.3 

Boots  and  shoes +  8.4  — 25.1 

Paper  making —  3.1  — 10.0 

Cigar  manufacturing  —  3.3  —  7.5 

Coal  mining   (bituminous)    —  2.9  —  2.0 

*  Monthly  Labor  Review,  vol.  XII,  No.  4,  p.  83. 

representative  industries  which  serves  to  reflect  existing  con- 
ditions. Table  No.  48  which  has  been  compiled  from  the 
February,  1921,  statements  illustrates  how  employment  ten- 
dencies may  be  judged.  In  each  industry,  the  number  of 
workers  employed  in  February,  1921,  was  less  than  in  Feb- 
ruary, 1920.  In  automobile  manufacturing,  textiles,  and 
leather  manufacturing,  the  decrease  was  over  33  1-3  per  cent. 
But  in  ten  out  of  the  fourteen  industries  the  number  of  workers 
in  February,  1921,  exceeded  that  in  January,  1921,  the  pre- 
ceding month.  This  would  clearly  indicate  that  industrial 
conditions  were  recovering  from  the  depression  that  was  so 
evident  in  January.5 

Employment  conditions  as  a  business  barometer. — The 
largest   difficulty  in  connection  with  the  use  of  employment 

"In  December,  1920,  the  United  States  Department  of  Labor  began  the  organi- 
zation of  an  industrial  employment  survey  of  the  United  States.  Monthly  bulle- 
tins are  issued  under  the  title  of  "Industrial  Employment  Survey  Bulletin." 
These  bulletins  show  (1)  a  graphic  curve  which  gives  the  monthly  trend  in  the 
number  of  workers;  (2)  a  cumulative  table  which  gives  the  percentage  of 
increase  or  decrease  in  employment  in  14  industrial  groups  as  set  up  by  the 
United  States  Census;  (3)  a  table  which  gives  a  geographic  analysis;  and  (4) 
current  comment  on  the  employment  situation  in  231  industrial  centers. — 
"Industrial  Employment  Survey  Bulletin,"  No.  3,  April,  1921,  p.  1. 

A  reproduction  of  the  cumulative  table  as  of  May  31,  1921,  is  appended 
(including  1,428   firms  employing  about   1,600,000)  : 


140 


BUSINESS  FORECASTING 


conditions  as  a  business  barometer  has  been  in  the  procure- 
ment of  reliable  statistics.  This  difficulty  is  now  being  ob- 
viated through  the  monthly  compilations  of  the  Department 
of  Labor  at  Washington,  one  of  which  shows  the  conditions 
of  employment  in  identical  establishments,  and  the  other  the 
increase  or  decrease  in  the  number  of  industrial  workers  in 
representative  industries. 

From  a  barometric  standpoint,  the  major  advantage  of  an 
accurate  knowledge  of  employment  conditions  is  in  judging 
the  relative  rapidity  with  which  business  recovers  from  a 
period  of  depression.  The  problem  of  labor  is  one  of  wages 
more  than  employment  when  business  is  active. 


INDUSTRIES  REPORTING  A  DECREASE  IN   EMPLOYMENT  IN   MAY, 


Per  cent  of 

Amount  of  decrease  from 

Industry                                          decrease  April  30, 1921 

Tobacco  manufacture   1,542  5.5 

Miscellaneous  industries 15,355  4.9 

Lumber    682  2.9 

Iron  and  steel   8,781  2.5 

Food  and  kindred  products 915  0.7 

Chemicals  105  0.1 

Metals  other  than  iron  3  0.004 

Total  decrease  in  7  industries   as 

listed    27,383 

INDUSTRIES  REPORTING  AN  INCREASE  IN  EMPLOYMENT  IN  MAY, 


1921 

Relative 

weight 

per  cent 

employed 

to  total 

employed 

1.7 
18.2 
1.4 
21.9 
7.9 
4.8 
4.7 


Amount  of 
Industry  increase 

Railroad  repair  shops 4,484 

Leather  and  products   1,942 

Vehicles  for  land  transportation   . . .  6,610 

Textiles  6,606 

Stone,  clay  and  glass 276 

Liquors  and  beverages   '       31 

Paper  and  printing 223 

Total   increase   in  7  industries   as 

listed    20,172 

Net   decrease   in    14   industries   as 

listed    7,211 

Net  decrease  in  14  industries  since 

January  1    54,596 


Per  cent  of 
increase  from 
April  30,  IQ2I 

8.4 
4.3 
3.8 
2.7 
2.0 
1.9 
0.4 


1921 

Relative 
weight 
per  cent 

employed 
to  total 

employed 

3.7 
3.0 

11.5 

16.1 

0.9 
0.1 
3.2 


0.45 


3.3 


BAROMETERS  OF  LABOR  CONDITIONS     141 

WAGES 

The  trend  of  wages. — Wages  follow  a  tendency  which  dif- 
fers materially  from  that  exhibited  by  the  other  indicia  of 
business  conditions.  In  the  first  place,  the  range  of  fluctua- 
tions is  not  so  great.  A  minimum  wage  is  established  by 
the  cost  of  the  essentials  of  life,  which  can  not  be  infringed 
upon  except  for  the  shortest  of  periods  if  the  workers  are 
to  survive.  No  such  limitation  obtains  in  the  case  of  prices, 
for  instance,  for  which  there  occasionally  appears  no  minimum. 
In  the  second  place,  the  usual  course  of  wages  is  to  follow  well 
behind  the  general  trend  of  activity.  This  is  not  always  the 
case,  however,  as  at  certain  points  in  the  business  cycle  the 
wage  trend  has  been  known  to  precede  the  general  trend. 

The  cycle  of  wages  as  a  separate  economic  phenomenon  is 
well  known.  Wages  increase  in  good  times  and  decrease  in 
poor  times.  In  a  period  of  business  activity,  labor  demands 
and  receives  higher  wages;  and  in  a  period  of  inactivity  is 
obliged  to  accept  reductions.  In  the  intervening  periods — 
comprising  the  theoretical  normal  times — wage  scales  remain 
fairly  stable.  A  study  of  the  index  number  of  the  average 
wages  per  hour  of  labor  in  the  United  States  during  the 

TABLE  No.  49.— INDEX  NUMBER  OF  WAGES  PER  HOUR,  1840-1920* 

(1913  =  100) 

Index                        Index  Index  Index 

Year               No.  Year               No.  Year  No.  Year  No. 

1840 33  1860 39    1880 60    1900 73 

1841 34  1861 40    1881 62    1901 74 

1842 33  1862 41    1882 63    1902 77 

1843 33  1863 44    1883 64    1903 80 

1844 32  1864 50    1884 64    1904 80 

1845 33  1865 58    1885 64    1905 82 

1846 34  1866 61    1886 64    1906 85 

1847 34  1867 63    1887 67    1907 89 

1848 35  1868 65    1888 67    1908 89 

1849 36  1869 66    1889 68    1909 90 

1850 35  1870 67    1890 69    1910 93 

1851 34  1871 68    1891 69    1911 95 

1852 35  1872........  69    1892 69    1912 97 

1853 35  1873 69    1893 69    1913 100 

1854 37  1874 67    1894 67    1914 102 

1855 38  1875 67    1895 68    1915 103 

1856 39  1876 64    1896 69    1916 Ill 

1857 40  1877 61    1897 69    1917 128 

1858 39  1878 60    1898 69    1918 162 

1859 39  1879 59    1899 70    1919 184 


*  Monthly  Labor  Review,  vol.  XII,  No.  2,  p.  74. 


1920 234 


142  BUSINESS  FORECASTING 

period  from  1840  to  1920,  as  shown  in  Table  No.  49,  indi- 
cates this  tendency  although  changes  in  the  value  of  the 
monetary  unit  of  measurement  somewhat  obscure  the  wage 
trend. 

Peculiarities  of  the  trend  in  wages. — Few  economic  phe- 
nomena are  better  known  than  the  fact  that  the  trend  in 
wages  tends  to  lag  behind  the  general  trend  in  conditions 
at  large.  Business  is  well  on  the  road  to  recovery  from  a 
period  of  depression  before  an  appreciable  increase  in  wages 
can  be  noted;  and  has  started  the  downward  trend  from  a 
period  of  activity  before  wages  are  adversely  affected.  The 
cause  arises  out  of  the  alternate  stages  of  unwillingness  on 
the  part  of  employers  and  employees  to  share  equitably  the 
advantages  and  disadvantages  which  changing  economic  con- 
ditions bring  forth.  A  period  of  business  activity  is  accom- 
panied by  higher  prices  and  larger  profits  in  which  labor 
usually  shares  only  after  the  period  is  well  developed.  The 
stage  of  retrogression  which  follows  a  period  of  activity  in- 
variably finds  labor  strongly  resisting  the  wage  reductions 
which  the  new  conditions  necessitate. 

The  trend  of  wages  and  prices. — A  comparison  of  the  rel- 
ative changes  in  wages  and  prices  during  the  period  from 
1890  to  1920,  as  shown  in  Table  No.  50,  leads  to  the  opinion 
that  certain  modifications  must  be  made  to  the  general  state- 
ment that  the  trend  in  wages  follows  the  trend  in  prices. 
In  a  period  of  recovery,  wages  apparently  start  to  advance 
before  prices.  This  is  due  not  to  a  betterment  in  conditions 
but  because  of  a  realization  that  wage  reductions  have  been 
too  drastic  and  that  an  upward  readjustment  is  imperative. 
This  advance  is  of  undoubted  assistance  as  a  contributing 
factor  to  the  recovery  in  industrial  activity  which  is  never  far 
distant  at  this  point. 

Although  wages  advance,  as  has  been  just  stated,  before 
the  period  of  depression  ends  and  thus  precede  the  rise  in 
prices  which  becomes  in  evidence  only  after  recovery  has 
begun,  the  advantage  is  not  long  sustained.  Once  the  up- 
ward movement  of  prices  begins,  the  advance  is  much  more 
rapid  than  in  the  case  of  wages.  During  the  dull  years  fol- 
lowing the  crisis  of  1893  wages  advanced  from  an  index 
number  of  67  in  1894  to  69  in  1898,  yet  prices  in  both  years 
showed  the  same  index  number,  69.  In  the  succeeding  period, 
from   1899   to    1907,  however,  prices   advanced  to  94  and 


BAROMETERS  OF  LABOR  CONDITIONS     143 

TABLE  No.   50.— COMPARISON   OF  INDEX   NUMBERS   OF  WHOLESALE 

PRICES  AND  WAGES  PER  HOUR,   1890-1920* 

(1913  =  100) 

Wholesale 
Year  Wages     prices  Year  Wages      prices 

1890. 
1891. 
1892. 
1893. 
1894. 


1895. 
1896. 
1897. 
1898. 
1899. 

1900. 
1901. 
1902. 
1903. 
1904. 


W  holesale 

Wages 

prices 

Y  ear 

69 

81 

1905 

69 

82 

1906 

69 

76 

1907 

69 

77 

1908 

67 

69 

1909 

68 

70 

1910 

69 

66 

1911 

69 

67 

1912 

69 

69 

1913 

70 

74 

1914 

73 

80 

1915 

74 

79 

1916 

77 

85 

1917 

80 

85 

1918 

80 

86 

1919 
1920 

82 

85 

85 

88 

89 

94 

89 

91 

90 

97 

93 

99 

95 

95 

97 

101 

100 

100 

102 

100 

103 

101 

111 

124 

128 

176 

162 

196 

184 

212 

234 

243 

*  Compiled  from  Monthly  Labor  Review,  vol.  XII,  No.  2,  pp.  45  and  74. 

wages  to  but  89.  In  1908,  the  year  following  the  crisis  oi 
1907,  prices  fell  to  91  but  wages  remained  at  89.  By  1911, 
however,  prices  had  advanced  to  99  while  wages  had  increased 
to  only  93.  The  period  from  1913  to  1915  which  marked 
the  opening  of  the  World  War  showed  that  wages  ad- 
vanced from  100  to  103  while  prices  had  increased  from 
100  to  but  101.  By  1917,  however,  prices  had  increased  to  176 
while  wages  had  advanced  to  only  128.  By  1920  wages  were 
rapidly  overtaking  prices  as  the  respective  index  numbers 
of  234  and  243  indicate.  In  January,  1921,  prices  had  fallen 
to  177,  but  wages  were  over  200,  thus  substantiating  the 
accepted  belief  that  in  the  downward  swing  of  the  cycle  wages 
invariably  lag  behind. 

Wages  as  a  barometer  of  business. — Under  ordinary  con- 
ditions the  trend  of  wages  follows  the  trend  of  general  con- 
ditions and  thus  limits  its  use  as  a  business  barometer.  In  a 
period  of  activity,  wages  increase  only  after  labor  is  brought 
to  the  realization  that  greater  compensation  can  be  obtained 
by  reason  of  new  economic  conditions.  In  a  period  of  retro- 
gression, wages  lag  behind  the  general  downward  trend  be- 
cause of  the  resistance  the  workers  offer  to  the  loss  of 
advantages  gained  during  the  period  of  activity. 

The  trend  of  wages  has  its  largest  significance  in  a  period 


144 


BUSINESS  FORECASTING 


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1919 

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MAJOR 
CRISIS 

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BAROMETERS  OF  LABOR  CONDITIONS     145 

of  depression  following  a  prolonged  stage  of  comparative 
inactivity.  Wages  reach  abnormally  low  levels  and  upward 
readjustments  are  necessary,  quite  apart  from  an  actual  im- 
provement in  business  conditions.  Any  tendency  on  the  part 
of  wages  to  increase  at  such  a  time  is  an  indication  that  the 
period  of  recovery  is  fairly  close  at  hand. 

INDUSTRIAL  CONTROVERSIES 

Periodicity  of  controversies. — Periods  of  extreme  indus- 
trial activity  are  invariably  marked  by  a  large  number  of 
controversies  which  develop  between  employers  and  em- 
ployees. The  most  common  cause  of  the  controversies  is  a 
demand  for  increased  wages,  although  shorter  hours,  and 
recognition  of  the  labor  unions  are  frequently  the  point  of 
contention.  Industrial  disputes  rarely  terminate  in  strikes 
or  lockouts  during  periods  of  depression  because  the  workers 
are  not  in  a  favorable  position  to  safeguard  their  interests. 
Even  after  business  has  recovered,  controversies  are  uncom- 
mon due  to  the  wage  increases  which  enlarged  profits  permit 
the  employers  to  pay  the  workers. 

As  industrial  activity  increases,  the  cost  of  living  goes  up, 
and  the  workers  find  it  necessary  to  seek  even  higher  wages. 
In  the  meantime  the  encroachment  of  production  costs  upon 
selling  prices  is  reducing  the  margin  of  profit  to  the  employers 
and  causing  them  to  resist  the  demand  for  increased  wages. 
An  impasse  is  eventually  reached  and  a  strike  or  lockout 
results.  An  increase  in  the  number  of  controversies  is  an 
indication  that  the  end  of  the  period  of  extreme  activity  is 
in  sight.  As  prosperity  wanes  and  the  business  cycle  swings 
downward,  the  number  of  controversies  increases  rather  than 
decreases  because  of  the  desire  of  the  workers,  not  to  continue 
to  seek  higher  wages,  but  to  hold  the  betterment  which  they 
gained  in  the  upward  swing. 

Strike  compilations. — Because  of  the  difficulty  involved  in 
securing  adequate  information,  no  complete  or  official  list  of 
strikes  are  compiled  in  the  United  States.  The  Department 
of  Labor  endeavors  to  maintain  as  accurate  a  record  as  pos- 
sible but  thus  far  has  met  with  limited  success.6 

""For  various  reasons,  in  spite  of  the  persistent  efforts  of  the  Bureau,  complete 
information  of  every  strike  cannot  be  obtained,  nor  is  it  possible  to  say  that  the 
information  is  correct  in  every  particular,  especially  since  statements  of  em- 
ployers and  employees  are  frequently  greatly  at  variance." — Monthly  Labor 
Review,  vol.  XI,  No.  3,  p.  190. 


146  BUSINESS  FORECASTING 

The  number  of  strikes  and  lockouts  for  which  information 
was  received  by  the  Department  of  Labor  during  the  calendar 
years  1914-1919  were  as  follows:  1914,  1,204;  1915, 
1,420;  1916,  3,789;  1917,  4,450;  1918,  3,337;  1919,  3,374. 
These  figures  do  not  afford  a  fair  criterion,  however,  due 
to  the  unusual  industrial  conditions  which  prevailed  during 
the  war  years,  notably  the  "cost-plus"  contracts  of  the 
Government.7 

Industrial  controversies  as  a  business  barometer. — Indus- 
trial controversies  which  develop  into  strikes  and  lockouts 
are  highly  significant.  A  scarcity  of  disputes  indicates  that 
industry  is  either  in  a  period  of  depression  or  of  gradual 
recovery  from  an  era  of  inactivity.  An  increase  in  the  number 
usually  signifies  that  business  has  entered  the  final  stage  of 
the  upward  movement  of  the  cycle.  Narrower  margins  of 
profits,  due  to  inability  to  continue  increasing  selling  prices 
to  offset  enlarged  production  costs,  cause  the  employers  to 
resist  further  demands  from  the  workers,  and  strikes  ensue. 
And  the  increase  in  the  number  of  disputes  foreshadows  the 
end  of  the  so-called  period  of  prosperity.  The  practical 
absence  of  controversies  during  periods  of  depression  and 
recovery,  however,  prevents  the  use  of  this  factor  as  a  cri- 
terion of  when  depression  ends  and  recovery  begins. 

MIGRATION 

The  two  forms  of  migration. — The  term  migration  covers 
the  international  movements  of  peoples.  In  the  United 
States,  immigration — the  inward  flow  of  aliens — completely 
overshadows  the  significance  of  emigration — the  outward 
flow.  This  must  naturally  be  so  in  any  country  similar  to  this 
nation  which  is  still  in  the  development  stage.  Immigration 
brings  a  multitude  of  problems,  social  and  otherwise,  but  the 
purpose  of  the  present  volume  limits  the  discussion  to  the 
economic  aspect. 

From  an  industrial  standpoint,  the  chief  interest  in  immi- 
gration lies  in  the   fact  that  herein  is  the  great  source  of 

TThe  first  six  months  of  1920  witnessed  a  world-wide  prevalence  of  strikes 
that  has  no  precedence  in  industrial  history.  A  compilation  which  appeared  in 
the  Journal  of  Commerce  (N.  Y.)  on  December  2,  1920,  estimated  the  number 
of  world  strikers  during  the  period  at  8,977,798.  The  German  estimate  was 
1,866,358;  Italy,  1,781,250;  France,  1,186,670;  Great  Britain,  1,117,040;  the 
United  States,  958,700;  Spain,  724,700;  Australia,  303,400;  and  Argentina, 
61,100. 


BAROMETERS  OF  LABOR  CONDITIONS     147 


l^o•0,■,**>,^wo, 

PROSPERITY 

1690 

1691 

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148  BUSINESS  FORECASTING 

unskilled  labor  which  is  continually  in  demand  in  this  country. 
If  immigrant  labor  always  remained  unskilled,  less  appre- 
hension might  be  felt  by  domestic  labor  which  is  chiefly  skilled. 
But  with  the  development  of  machinery  and  the  natural  apti- 
tude of  many  aliens  to  grasp  mechanical  processes,  the  un- 
skilled immigrant  of  to-day  becomes  to-morrow  a  worthy 
competitor  of  the  skilled  American  craftsman. 

Effect  of  immigration  upon  industrial  conditions. — Prior 
to  the  World  War,  the  number  of  immigrant  arrivals  in 
the  United  States  annually  averaged  close  to  1,000,000.  In 
1907,  the  arrivals  totaled  1,285,349  and  in  1914  the  number 
was  1,218,480.  Not  all  of  these  immigrants  were  able- 
bodied  male  workers,  but  the  majority  were,  and  their  ab- 
sorption was  not  without  effect  upon  the  industrial  situation. 
Rapid  as  the  economic  development  of  the  country  has  been, 
it  has  not  at  all  times  been  able  to  keep  pace  with  the  increase 
in  the  number  of  workers  and  it  is  significant  to  note  that 
a  slump  in  business  conditions  has  been  usually  preceded  by  a 
substantial  increase  in  immigration. 

It  is  not  fair  to  assume,  as  is  done  in  some  quarters,  that 
the  increase  in  immigration  caused  the  reaction  in  business. 
Quite  possibly,  it  was  one  of  the  minor  contributing  factors 
which  hastened  the  reaction,  but,  as  has  been  shown,  the 
chief  causes  lie  in  other  developments.  From  Table  No.  51 
the  opinion  may  readily  be  formed  that  alternate  periods  of 
prosperity  and  depression  arc  a  cause  of  changes  in  immigra- 
tion rather  than  an  effect. 

Immigration  as  a  business  barometer. — The  efficacy  of 
immigration  statistics  as  a  business  barometer  is  open  to  con- 
siderable question.  Whether  an  immigrant  moves  from  one 
land  to  another  does  not  depend  entirely  upon  economic  and 
social  conditions  in  the  new  land.  The  dominant  factor  is 
the  relationship  between  conditions  in  the  new  land  and  the 
old.  Adverse  conditions  in  one  land  may  be  favorable  in 
comparison  with  existing  conditions  in  another.  So  a  mere 
increase  in  the  number  of  arrivals  does  not  necessarily  sig- 
nify prosperity  present,  past,  or  future  in  a  country. 

Moreover  it  has  not  been  established  that  a  substantial 
increase  in  the  number  of  immigrants  has  caused  the  indus- 
trial depressions  of  the  past.  The  depression  of  1920  fol- 
lowed five  years  during  which  immigration  had  practically 
ceased.     The  increase  in  the  number  of  immigrants  prior  to 


BAROMETERS  OF  LABOR  CONDITIONS     149 

TABLE  No.  51.— IMMIGRATION  INTO  THE  UNITED  STATES,  1851-1920* 
(fiscal  years  ended  June  30) 

Year  Arrivals  Year  Arrivals 

1851 379,466  1886 334,203 

1852 371,603  1887 490,109 

1853 368,645  1888 546,889 

1854 427,833  1889 444,427 

1855 200,877  1890 455,302 

1856 195,857  1891 560,319 

1857 112,123  1892 623,084 

1858 191,942  1893 502,917 

1859 129,571  1894 314,467 

1860 133,143  1895 279,948 

1861 142,877  1896 343,267 

1862 72,183  1897 230,832 

1863 132,925  1898 229,299 

1864 191,114  1899 311,715 

1865 180,339  1900 448,572 

1866 332,557  1901 487,918 

1867 303,104  1902 648,743 

1868 138,840  1903 857,046 

1869 352,768  1904 812,870 

1870 387,203  1905 1,026,499 

1871 321,350  1906 1,100,735 

1872 404,806  1907 1,285,349 

1873 459,803  1908 782,870 

1874 313,339  1909 751,786 

1875 227,498  1910 1,041,570 

1876 169,986  1911 878,587 

1877 141,857  1912 838,172 

1878 138,469  1913 1,197,892 

1879 177,826  1914 1,218,480 

1880 457,257  1915 326,700 

1881 669,431        1916 298,826 

1882 788,992        1917 295,403 

1883 603,322        1918 110,618 

1884 518,592        1919 141,132 

1885 395,346        1920 430,001 

1921 805,228 

♦From  "Annual  Report  of  the  Commissioner  General  of  Immigration,"  1920, 
op.  p.  277. 

other  years  of  depression  was  more  likely  an  effect  of  chang- 
ing conditions  than  a  cause,  a  belief  which  is  substantiated 
by  the  decrease  in  arrivals  during  the  years  immediately 
following. 

But  apart  from  the  records  of  the  past,  the  use  of  immi- 
gration statistics  as  a  business  barometer  in  the  future  is  to 


150  BUSINESS  FORECASTING 

be  subject  to  decided  limitations.  The  days  of  free  and  un- 
restricted immigration  are  apparently  over.  Legislation  has 
already  been  enacted  under  the  terms  of  which  the  maximum 
arrivals  permitted  in  the  fiscal  year  ended  June  30,  1922,  is 
limited  to  less  than  the  total  immigration  during  the  first  half 
of  the  preceding  fiscal  year.  A  strong  probability  exists  that 
this  law  will  be  followed  by  another  which  will  in  a  similar 
manner  restrict  alien  arrivals  and  thus  reduce  the  efficiency 
of  this  factor  as  a  business  barometer.8 

8  Under  the  Immigration  Act  which  became  a  law  in  the  United  States  on 
May  19,  1921,  the  number  of  immigrants  from  each  foreign  country  who  will 
be  admitted  to  this  country  during  the  fiscal  year  which  will  end  on  June  30, 
1922,  is  limited  to  3  per  cent  of  the  nationals  of  each  country  who  were  here  in 
1910.  Under  this  restriction  the  maximum  number  of  persons  who  will  be  per- 
mitted to  land  from  the  various  countries  in  Europe  and  Turkey  in  Asia  is 
estimated  at  355,461.  The  Commercial  and  Financial  Chronicle  (N.  Y.),  vol. 
112,  No.  2905,  p.  801. 


Chapter  IX 

BAROMETERS  OF  BUSINESS  PROFITS 

Barometers  of  prosperity. — Since  the  acquirement  of  mone- 
tary profit  is  the  chief  actuating  force  in  business,  the  measure- 
ment of  relative  earnings  should  provide  a  serviceable 
method  of  determining  the  trend  of  general  conditions.  The 
degree  of  prosperity  which  exists  at  any  particular  time  is 
reflected  in  various  ways.  The  published  earnings  of  the 
large  corporations  are  indicative  of  conditions  throughout 
the  mercantile  world,  and  especially  in  the  United  States 
where  the  corporate  form  of  business  organization  is  most 
popular.1  Changes  in  the  number  of  business  firms  which 
become  insolvent  or  bankrupt  constitutes  another  criterion. 
The  volume  and  nature  of  new  security  offerings  reflects 
general  financial  conditions  both  from  the  standpoint  of  the 
corporations  and  of  the  investing  public. 

CORPORATE  EARNINGS 

The  information  available. — The  information  which  is 
available  concerning  corporate  profits  is  far  from  satisfac- 
tory. Promptness  is  essential  if  current  business  information 
is  to  be  utilized  for  barometric  purposes.  Reports  of  indi- 
vidual corporate  earnings  are  usually  rendered  long  after  the 
period  covered  has  terminated,  and  by  that  time  the  figures 
have  lost  their  utility  as  barometers.  Accounting  difficulties 
militate  against  prompter  and  more  frequent  earnings  state- 
ments, and  cause  the  average  company  to  compile  a  state- 
ment of  profit,  at  least  for  public  information,  but  once  a 
year.  It  ordinarily  takes  from  one  to  three  months  to  pre- 
pare this  annual  statement,  which  means  that  profits  earned 
during  the  late  winter  and  spring  and  summer  of  one  year 
are  not  made  public  until  February  or  March  of  the  follow- 
ing year.  Annual  corporate  earnings  statements  therefore 
do  not  reflect  accurately  business  profits   as   they   are  when 

1In  the  fiscal  year  which  ended  on  June  30,  1920,  a  total  of  319,628  corpora- 
tions paid  taxes  to  the  United  States  Government.  "Annual  Report  of  the 
Commissioner  of  Internal  Revenue,"  1920,  p.  105. 

151 


152  BUSINESS  FORECASTING 

the  statements  are  issued,  but  as  they  were  during  the  pre- 
ceding year.  Moreover,  annual  income  reports  are  particu- 
larly unsatisfactory  for  barometric  purposes  because  profits 
are  generally  reported  for  the  entire  year  and  no  method  is 
afforded  of  determining  the  trend  in  profits  during  the  year. 
The  year  1920  was  notable  in  this  respect.  The  first  six 
months  were  unusually  active  and  the  last  six  decidedly  dull 
in  most  industries.  As  a  result  the  earnings  statements  pre- 
sented a  hodge-podge  of  little  barometric  significance. 

Fortunately  this  shortcoming  does  not  hold  good  for  all 
corporations.  The  railroads  and  the  public  utility  com- 
panies in  general  are  required  to  file  monthly  statements  of 
gross  and  net  revenue  with  the  various  Federal  and  State 
commissions.  Certain  of  the  industrial  companies  issue  quar- 
terly statements  of  earnings  which  arc  especially  valuable  as 
barometers. 

Railroad  earnings. — The  monthly  reports  of  the  gross  and 
net  earnings  of  the  American  railroads  afford  a  double  criterion 
for  judging  business  conditions.  The  gross  earnings  serve  as 
an  indication  of  the  business  activity  of  the  nation  although 
frequent  changes  in  rates  prevent  the  ready  comparison  of 
corresponding  periods.  As  is  discussed  previously,  however, 
records  of  car  loadings  and  idle  cars  are  better  indicia  for  this 
purpose.  The  net  earnings,  i.e.,  the  gross  earnings  less  the 
operating  expenses  but  before  the  payment  of  interest  charges, 
show  the  prosperity  of  the  railroad  industry,  and  it  is  with 
net  earnings  that  the  present  discussion  is  concerned. 

With  the  single  exception  of  agriculture,  railroading  engages 
the  services  of  the  largest  number  of  workers  in  the  United 
States.2  Moreover,  the  railroad  companies  are  the  largest 
single  class  of  purchasers  of  American  products.  The  state- 
ment has  been  made  that  the  country  is  never  any  more  pros- 
perous than  the  railroads.  That  a  large  element  of  truth  is 
contained  in  this  statement  is  shown  by  the  dependence,  direct 
and  indirect,  placed  upon  railroad  prosperity  throughout  the 
country.  If  the  roads  are  not  prospering,  the  wages  of  the 
employees  must  be  adversely  affected  and  a  considerable  degree 
of  purchasing  power  is  curtailed.  If  earnings  are  low,  orders 
for  new  construction  and  equipment  will  be  reduced  with  detri- 

2  The  number  of  employees  on  the  Class  I  railroads  of  the  United  States  in 
1918  was  1,837,663.  The  total  on  all  roads  was  approximately  1,929,000. 
"Statistics  of  Railways  in  the  United  States,"  1918,  p.  20. 


BAROMETERS  OF  BUSINESS  PROFITS       153 

ment  to  a  sequence  of  industries  which  supply  the  required 
materials.  And  last  but  not  least  in  importance,  if  the  roads 
are  not  making  money,  the  adequacy  of  transportation  facili- 
ties is  imperilled — a  condition  truly  serious  in  a  nation  where 
transportation  is  a  vital  factor. 

The  net  earnings  of  the  principal  United  States  railroads 
during  the  period  from  1910  to  1920  are  shown  in  Table  No. 
52.  The  large  decrease  during  the  years  1919  and  1920  was 
due  not  to  a  falling-off  in  gross  revenue  but  to  substantial  in- 

TABLE  No.  52.— NET  EARNINGS  OF  PRINCIPAL  UNITED  STATES 
RAILROADS,  1910-1920* 

Year                            Net  earnings  Year  Net  earnings 

1910 $909,470,000       1916 $1,272,639,000 

1911 883,626,000       1917 1,215,110,000 

1912 937,968,000       1918 905,794,000 

1913 907,022,000      1919 764,578,000 

1914 828,522,000       1920 461,922,000 

1915 1,040,304,000 

•From  The  Financial  and  Commercial  Chronicle,  vol.  112,  No.  2908,  p.  1080. 

creases  in  operating  expenses.     The  facility  with  which  the 
railroads   will    prove    able    to    regain    their    former    earning 
capacity  during  the  years  ahead  will  be  a  factor  of  large  im-^ 
portance  in  determining  the  duration  of  the  stage  of  industrial 
depression  which  exists  as  this  chapter  is  being  written.3 

Public  utility  earnings. — The  public  utility  companies  which 
include  the  electric  light,  heat,  and  power  companies,  the  water 
and  gas  plants,  the  telephone  and  telegraph  services,  and  the 
traction  companies,  have,  as  a  class,  the  most  stable  gross 
revenues.  The  demand  for  the  product  of  the  utility  com- 
panies is  largely  independent  of  business  conditions  and  thus 
differs  materially  from  the  demand  for  steam  railroad  service 
or  the  products  of  industrial  concerns.  Accordingly  little  baro- 
metric value  may  be  found  in  the  reports  of  gross  earnings  of 
these  companies. 

Industrial  earnings. — Although  the  majority  of  the  indus- 
trial companies  issue  a  statement  of  earnings  but  once  a  year, 
a  few  of  the  larger  companies  issue  quarterly  reports.4     A 

'June,  1921. 

*  In  addition  to  the  United  States  Steel  Corporation,  the  following  important 
industrial  companies  issue  quarterly  reports:  American  Hide  and  Leather  Co., 
Central  Leather  Co.,  Utah  Copper  Co.,  Colorado  Fuel  and  Iron  Co.,  Corn  Prod- 
ucts Refining  Co.,  International  Nickel  Co.,  Lackawanna  Steel  Co.,  Midvale 
Steel  Co.,  and  Republic  Iron  and  Steel  Co. 


154  BUSINESS  FORECASTING 

summary  of  the  net  earnings  of  the  United  States  Steel  Cor- 
poration for  the  period  from  1906  to  1920  is  shown  in  Table 
No.  S3.  A  study  of  this  statement  shows  that  it  reflects  quite 
accurately  existing  conditions  with  a  certain  tendency  to  follow 
the  trend  rather  than  precede.  The  depression  which  followed 
the  panic  of  1907  is  reflected  in  the  substantially  reduced 
earnings  throughout  1908.  But  the  earnings  during  the  last 
quarter  of  1914 — only  $10,933,000  the  lowest  point  in  the 
entire  tabulation — did  not  foretell  that  the  same  period  the 
following  year  would  prove  the  most  profitable  up  to  that 
time.  And  the  large  earnings  during  the  third  and  fourth 
quarter  of  1920  did  not  reflect  the  reaction  which  had  already 
set  in. 

TABLE  No.  53.— NET  EARNINGS  OF  UNITED  STATES  STEEL  COR- 
PORATION, 1906-1920* 
(000  omitted) 

First  Second  Third  Fourth 

Year  quarter  quarter  quarter  quarter 

1920 $42,089  $43,155  $48,051  $43,877 

1919 33,513  34,331  40,177  35,791 

1918f 88,546  153,273  144,948  86,354 

1917f 113,121  144,498  131,976  102,674 

1916 60,713  81,126  85,817  105,968 

1915 12,457  27,950  38,710  51,232 

1914 17,994  20,457  22,276  10,933 

1913 34,426  41,219  38,450  23,036 

1912 17,826  25,102  30,063  35,185 

1911 23,519  28,103  20,522  23,105 

1910 37,616  40,170  37,365  25,901 

1909 22,291  29,340  32,246  40,982 

1908 18,229  20,265  27,106  26,246 

1907 39,122  45,503  43,804  32,534 

1906 36,634  40,125  38,114  41,750 

♦From  New  York  Evening  Post,  April  30,  1921,  p.  4F. 

t  Earnings  for  1917  and  1918  are  before  deduction  of  war-profits  tax. 

Dividend  payments. — As  dividends  are  paid  out  of  earn- 
ings, either  current  or  accumulated,  a  direct  relationship  exists 
between  the  two.5  Statistics  of  dividend  payments  must  be 
broadly  interpreted  for  barometric  purposes.  Some  concerns 
endeavor  to  pay  a  certain  amount  regularly  regardless  of  ex- 

5  Dividends  are  usually  paid  only  from  current  earnings.  The  practice  of 
drawing  upon  surplus  earnings  from  previous  periods  to  pay  dividends  when 
current  profits  are  insufficient  is  sometimes  justified  but  vitiates  the  record  of 
dividend  payments  as  a  barometer. 


BAROMETERS  OF  BUSINESS  PROFITS      155 

isting  conditions,  while  others  believe  it  fairer  to  pay  dividends 
more  in  accordance  with  the  fluctuations  in  earnings.  Ob- 
viously the  dividend  record  of  a  company  following  the  first 
policy  would  be  a  poor  criterion  of  current  prosperity,  while 
that  of  a  company  following  the  second  method  should  be  a 
good  standard. 

TABLE  No.   54.— DIVIDEND  RECORD  OF  THE  PENNSYLVANIA  RAIL- 
ROAD COMPANY,  1856-1921* 

Dividend  Dividend  Dividend 

Year  rate  Year  rate  Year  rate 

per  cent  per  cent  per  cent 

1856 8  1881 8  1906 6i 

1857 4  1882 6i  1907 7 

1858 6  1883 4i  1908 6 

1859 6  1884 5  1909 6 

1860 6  1885 5  1910 6 

1861 6  1886 5     1911 6 

1862 8  1887 5     1912 6 

1863 9  1888 5     1913 6 

1864 10  1889 Si           1914 6 

1865 10  1890 5     1915 6 

1866 9  1891 3     1916 6 

1867 6  1892 6}     1917 6 

1868 8  1893 5      1918 6 

1869 10  1894 5      1919 6 

1870 10  1895 5     1920 6 

1871 10  1896 5  1921 4 

1872 10  1897 5  

1873 5  1898 5  

1874 10  1899 5  

1875 8  1900 6  


1876 8  1901 6  

1877 3  1902 6  

1878 2\  1903 6  

1879 4  1904 6  

1880 3£  1905 6  

*  From  "Standard  Corporation  Records,"  Standard  Statistics  Co.,  card  P-l. 

The  dividend  record  of  the  Pennsylvania  Railroad  Company, 
as  shown  in  Table  No.  54,  is  of  interest  in  this  connection  for 
several  reasons.  This  company  has  paid  dividends  continu- 
ously since  1856,  a  record  which  is  not  surpassed  by  any  other 
American  enterprise  of  importance.  The  policy  of  the  com- 
pany, at  least  since  1884  has  been  to  maintain  a  fixed  dividend 
rate.     Hence  the  dividend  record  from  that  time  until  1921 


156  BUSINESS  FORECASTING 

TABLE  No.  55.— DIVIDEND  RECORD  OF  THE  UNITED  STATES  STEEL 
CORPORATION,  1902-1920* 

Dividend  Dividend 

Year  rate  Year  rate 

per  cent  per  cent 

1902 4  1912 5 

1903 ii  1913 5 

1904 0  1914 4i 

1905 0  1915 0 

1906 3  1916 7 

1907 2  1917 12 

1908 '..  2  1918 16 

1909 2|  1919 6 

1910 5  1920 5 

1911 5 

*  Compiled  from  "Poor's  Manual  of  Industrials,"  1920,  p.  1894. 

does  not  reflect  the  economic  difficulties  of  the  intervening 
period.  The  action  of  the  company  in  reducing  the  rate  to 
4  per  cent  in  1921  is  therefore  particularly  significant.  It 
would  indicate  that  in  the  opinion  of  the  management  of  the 
road,  conditions  were  more  adverse  in  1921  than  at  any  time 
since  1891. 

The  dividend  record  of  the  United  States  Steel  Corporation 
during  the  years  1902  to  1920,  as  shown  in  Table  No.  55, 
is  in  interesting  contrast  to  that  of  the  Pennsylvania  Railway. 
The  steel  company  has  followed  the  policy  of  distributing  divi- 
dends in  accordance  with  earnings.  As  a  result  the  change  in 
the  rate  of  dividends  parallels  closely  the  trend  in  general 
business  conditions. 

Corporate  earnings  as  a  business  barometer. — The  net 
earnings — as  distinguished  from  the  gross  revenues — of  the 
leading  American  corporations  afford  information  of  some- 
what limited  barometric  value.  Ordinarily  the  income  state- 
ments are  published  too  late  to  reflect  current  conditions,  but 
this  is  not  entirely  the  case.  Of  the  three  classes  of  industry, 
railroads,  utilities,  and  the  true  industrials,  the  income  reports 
of  the  first  are  of  most  importance  because  they  are  issued 
more  promptly  and  more  frequently  and  because  of  the  number 
of  persons  directly  engaged  in  railroading  and  of  the  depen- 
dence of  many  allied  industries  upon  railroad  prosperity.  In- 
come statements  of  public  utility  companies  are  of  practically 
no  forecasting  value  because  of  the  relative  stability  of  earn- 
ings in  this  field.     The  income  statements  of  the  industrial 


BAROMETERS  OF  BUSINESS  PROFITS       157 

companies  which  are  issued  quarterly  indicate  existing  condi- 
tions with  fair  accuracy  but  the  trend  follows  rather  than 
anticipates  changing  conditions.  Railroad  net  earnings  are  of 
large  significance,  surpassed  only  by  the  crops  and  credit  con- 
ditions in  determining  future  economic  developments. 

Dividend  payments  are  of  significance  only  ( 1 )  in  the  case 
of  companies  as  the  United  States  Steel  Corporation  which 
follows  a  practice  of  paying  dividends  in  proportion  to  current 
earnings,  and  (2)  whenever  the  dividend  policy  of  established 
companies  is  changed.  In  the  first  case,  the  rate  of  dividend 
reflects  the  extent  of  current  corporate  prosperity.  In  the 
second  case,  a  general  tendency  on  the  part  of  corporations 
to  declare  extra  dividends  indicates  a  marked  degree  of  pros- 
perity whereas  a  tendency  to  reduce  and  suspend  dividend 
payments  reflects  impaired  profits.6 

BUSINESS    FAILURES 

Causes  of  business  failures. — In  the  true  sense,  no  record 
is  kept  of  the  number  of  business  failures.  The  records  which 
are  available  indicate  simply  the  number  of  firms  which  become 
insolvent  or  bankrupt.  The  great  majority  of  those  who  fail 
in  business  simply  withdraw  and  cover  their  losses  from  out- 
side sources.  The  reason  why  business  firms  fail  has  been  the 
subject  of  considerable  research.  One  of  the  large  mercantile 
reporting  agencies7  reports  annually  the  percentage  due  to  vari- 
ous causes  and  finds  the  two  principal  causes  to  be  incompe- 
tence and  lack  of  capital.  A  more  comprehensive  cause  is  lack 
of  foresight. 

Inability  to  foresee  economic  developments  will  always  re- 
main the  chief  cause  of  business  failure.  In  the  compilation 
just  referred  to,  the  statement  shows  that  of  the  total  failures 
in  1907  incompetence  caused  22.6  per  cent,  and  lack  of  capital, 
37.1  per  cent,  and  specific  conditions,  16.3  per  cent.  In  the 
following  year,  1908,  incompetence  caused  21.6  per  cent,  lack 
of  capital,  34.2  per  cent,  and  specific  conditions,  18.9  per  cent, 
— practically  no  change  from  1907.  But  the  total  failures  in 
1908  amounted  to  15,690,  an  increase  of  34  per  cent  over  the 
1907  total  of   11,725.     It  is  not  reasonable  to  believe  that 

"Payments  of  dividends  in  scrip,  i.e.,  promissory  notes,  is  always  a  danger 
sign,  in  individual  cases,  of  the  company,  and  in  numerous  cases,  of  weakness 
vn  the  entire  financial  situation. 

1  "Bradstreet's." 


158  BUSINESS  FORECASTING 

precisely  the  same  causes  in  two  successive  years  could  result 
so  differently.  The  reason  for  the  increase  in  the  number  of 
failures  in  1908  was  because  the  economic  developments  of 
the  early  part  of  the  year  were  not  properly  foreseen. 

The  trend  of  commercial  failures. — The  number  of  business 
failures  parallels  closely  the  trend  of  business  conditions.  In 
a  period  of  activity,  which  includes  the  stages  of  recovery  and 
prosperity  in  the  business  cycle,  business  failures  decrease  in 
number,  while  in  a  period  of  inactivity,  which  comprises  the 
stages  of  relapse  and  depression,  the  number  increases.  Thr 
reason  is  fairly  obvious.  Business  prosperity  depends  upon 
the  relationship  of  prices,  for  the  competent  as  for  the  incom- 
petent, for  the  firm  with  plenty  of  capital  as  for  the  firm 
handicapped  by  a  lack  of  capital.  In  a  period  of  activity, 
prices  advance,  and  profits  are  easily  secured.  No  sagacity  is 
needed;  simply  the  act  of  buying  with  ordinary  caution,  selling 
a  short  time  thereafter,  and  thereby  taking  advantage  of  the 
increase  in  price  which  came  in  the  interval.  Under  such 
conditions,  the  number  of  failures  naturally  decreases.  In  a 
period  of  inactivity,  prices  fall,  and  profits  are  accordingly 
difficult  to  obtain.  The  number  of  failures  increases  as  a 
consequence. 

Relationship  between  number  of  failures  and  amount  of 
liabilities. — From  a  theoretical  viewpoint,  the  number  of  busi- 
ness failures  should  be  less  important  than  the  amount  of  the 
liabilities.  One  large  failure  has  a  greater  effect  than  many 
minor  insolvencies.  Reference  to  Table  No.  S6,  however, 
shows  that  for  the  aggregate,  the  amount  of  liabilities  varies 
in  proportion  closely  with  the  number  of  failures.  It  should 
be  appreciated,  none  the  less,  that  when  the  business  cycle 
swings  from  prosperity  into  relapse,  the  amount  of  liabilities 
increases  in  greater  proportion  than  the  number  of  failures. 

Relationship  between  number  of  failures  and  number  of 
firms  in  business. — Again,  from  a  theoretical  viewpoint,  the 
actual  number  of  failures  should  be  less  significant  than  the 
percentage  of  firms  failing.  In  a  country  such  as  the  United 
States,  which  has  yet  to  attain  its  maximum  growth,  the  number 
of  firms  in  business  is  constantly  increasing,  and  this  should 
tend  to  make  invalid  the  comparison  of  different  years  on  the 
basis  of  number  of  failures  alone.  However,  as  is  shown  in 
Table  No.  56,  the  percentage  of  firms  failing  even  when  con- 
ditions are  most  adverse  is  extremely  small,  rarely  exceeding 


BAROMETERS  OF  BUSINESS  PROFITS       159 

TABLE  No.  56.— COMMERCIAL  FAILURES  IN  THE  UNITED  STATES, 

1891-1920* 

Percentage 
Number  of  Amount  of  of  concerns 

Year  failures  liabilities  failing 

1891 12,273  $189,868,000  1.07 

1892 10,344  114,044,000  0.88 

1893 15,242  346,779,000  1.28 

1894 13,885  172,992,000  1.25 

1895 13,197  173,196,000  1.09 

1896 15,088  226,096,000  1.31 

1897 13,351  154,332,000  1.26 

1898 12,186  130,662,000  1.10 

1899 9,337  90,879,000  0.81 

1900 10,774  138,495,000  0.92 

1901 11,002  113,092,000  0.90 

1902 11,615  117,476,000  0.93 

1903 12,069  155,444,000  0.94 

1904 12,199  144,202,000  0.92 

1905 11,520  102,676,000  0.85 

1906 10,682  119,201,000  0.77 

1907 11,725  197,385,000  0.82 

1908 15,690  222,315,000  1.08 

1909 12,924  154,603,000  0.80 

1910 12,652  201,757,000  0.80 

1911 13,441  191,061,000  0.81 

1912 15,452  203,117,000  0.98 

1913 16,037  272,672,000  0.99 

1914 18,280  357,908,000  1.10 

1915 22,156  302,286,000  1.32 

1916 16,993  196,212,000  0.99 

1917 13,855  182,441,000  0.80 

1918 9,982  163,019,000  0.58 

1919 6,451  113,291,000  0.38 

1920 8,881  295,121,000  0.49 

♦From  "Dun's  Review,"  V.  29,  No.  1424,  p.  18-19. 

1  per  cent.  The  percentage  is  always  too  close  to  zero  for 
comparative  purposes.  Moreover,  the  continual  change  of  the 
base  prevents  exact  comparison  between  corresponding  periods. 
Commercial  failures  as  a  business  barometer. — The  fact 
that  the  trend  of  commercial  failures  indicates  so  accurately 
current  business  conditions  makes  the  number  of  failures  one 
of  the  most  satisfactory  business  barometers.  The  problem 
of  successful  forecasting  would  be  greatly  simplified  if  it  were 
possible  truly  to  appreciate  conditions  at  the  time  they  exist. 
The  knowledge  that  a  certain  company  is  not  making  satis- 
factory profits  can  be  withheld  until  the  annual  statement  is 


160 


BUSINESS  FORECASTING 


BAROMETERS  OF  BUSINESS  PROFITS       161 

issued,  probably  months  later.  But  the  knowledge  that  any 
company  is  unable  to  arrange  payment  of  its  maturing  obliga- 
tions becomes  current  immediately,  and  serves  as  a  barometer 
of  what  the  near  future  has  in  store. 

The  trend  of  commercial  failures  has  almost  invariably  fore- 
told  the  trend  of  business  conditions.  When  business  failures 
continue  to  decrease  until  they  approximate  previous  low 
records,  the  storm  flags  signal  danger  ahead.  After  the  reac- 
tion has  come,  the  number  increases.  The  barometer  does  not 
work  so  well  in  periods  of  depression,  but  recovery  cannot  be 
assumed  to  have  definitely  started  until  there  is  an  appreciable 
decrease  in  the  number  of  failures.8 

NEW  SECURITY  ISSUES 

The  financial  policy  of  corporations. — Capital  is  essential  in 
business.  The  amount  of  capital  which  a  company  has  does 
not  determine  its  earning  power,  but  it  is  a  contributing  factor 
of  large  importance.  Capital  may  be  secured  in  either  of  two 
ways.  The  money  may  be  borrowed,  in  which  case  bonds  are 
issued;  or  investors  may  be  induced  to  become  part  proprietors 
in  the  enterprise,  in  which  event  stock  is  issued.  It  is  obvious 
that  capital  requirements  will  increase  in  a  period  of  activity, 
and  decrease  in  a  period  of  depression.  Certain  requirements, 
however,  are  independent  of  current  conditions.  As  has  been 
stated,  when  money  is  borrowed,  bonds  are  issued  which  have 
a  maturity  date  some  time  in  the  future.  At  the  due  date,  the 
company  will  customarily  refund  the  issue  by  selling  new  bonds 
thus  increasing  the  total  of  new  security  issues  irrespective  of 
current  conditions.  In  fact,  a  large  share  of  the  new  issues 
during  periods  of  depression  arise  from  such  refunding  opera- 
tions, which  is  one  reason  why  bond  issues  dominate  in  times 
of  depression  and  stock  issues  arc  more  common  in  times  of 
prosperity. 

Nature  of  the  issues. — The  income  derived  from  stock  de- 
pends upon  the  earnings  of  the  company,  whereas  the  income 
from  bonds  is  a  fixed  amount.  In  time  of  activity  profits  in- 
crease, and  investors  naturally  desire  stock;  whereas  in  times 
of  depression  earnings  are  low  and  consequently  bonds  are 

*  In  studying  the  number  of  commercial  failures  from  month  to  month,  allow- 
ance should  be  made  for  seasonal  tendencies.  Failures  are  usually  most  nu- 
merous in  February  because  of  insolvencies  arising  from  year-end  settlements. — 
Neiv  York  Evening  Post,  February  19,  1921,  Sec.  2,  p.  1. 


162  BUSINESS  FORECASTING 

more  popular.  As  the  period  of  prosperity  continues,  the 
nature  of  the  new  offerings  become  more  and  more  speculative. 
Investors  are  no  longer  content  with  reasonable  profits,  de- 
mand larger  returns,  and  encourage  the  offering  of  securities 
of  the  "wild-cat"  variety  whose  chief  virtue  is  the  promise  of 
exceptionally  large  profits.  Corporations  which  are  obliged 
to  borrow  at  this  time,  do  so  through  issuing  short-term  notes 
in  anticipation  of  refunding  into  long-term  bonds  at  lower 
interest  rates  at  maturity. 

Reflection  of  general  prosperity. — The  relative  facility  with 
which  new  security  issues  are  floated,  i.e.,  absorbed  by  the 
investing  public,  reflects  the  extent  of  general  prosperity.  As 
securities  must  be  paid  for,  the  ability  to  purchase  new  securi- 
ties depends  upon  the  earning  power  of  the  public.  Conse- 
quently a  large  increase  in  the  amount  of  new  issues  indicates 
a  corresponding  increase  in  the  earning  power  of  the  people. 
The  sale  of  $3,106,930,000  in  new  securities  in  the  United 
States  in  1920  was  equivalent  to  an  average  investment  of 
over  $3,000  by  one  million  individuals. 

The  trend  of  new  security  issues. — The  volume  of  new 
securities  issued  by  private  corporations  in  the  United  States 
during  the  period  from  1907  to  1920  is  shown  in  Table  No. 
57.     It  will  be  noted  that  this  compilation  does  not  include 

TABLE  No.   57.— NEW  ISSUES  OF  SECURITIES  BY  PRIVATE  UNITED 
STATES  CORPORATIONS,   1907-1920* 

1907 $1,393,919,000 

1908 1,428,109,000 

1909 1,681,620,000 

1910 1,518,270,000 

1911 1,739,487,000 

1912 2,253,587,000 

1913 1,645,736,000 

1914 1,436,517,000 

1915 1,435,351,000 

1916 2,186,499,000 

1917 1,529,970,000 

1918 1,344,810,000 

1919 3,021,171,000 

1920 3,106,930,000 


The  Journal  of  Commerce  (N.  Y.),  January  3,  1921,  Part  2,  p.  4. 


the  Liberty  bonds  of  which  over  $20,000,000,000  were  sold 
during  the  war  years  of  1917,   1918,  and   1919.     It  will  be 


BAROMETERS  OF  BUSINESS  PROFITS       163 

seen  that  the  amount  of  new  issues  increased  gradually  from 
1907  to  1912,  which  increase  reflected  more  the  natural  growth 
of  the  country  and  the  increasing  popularity  of  the  corporate 
form  of  organization  than  any  proportionate  betterment  in 
business  conditions.  The  decrease  in  1917  and  1918  was 
caused  by  the  unwillingness  of  private  borrowers  to  compete 
with  the  Government  in  the  investment  market. 

New  security  issues  as  a  barometer  of  business. — Except 
in  a  most  general  way,  the  volume  of  new  security  issues  has 
little  barometric  value.  The  volume  increases  during  periods 
of  activity  and  decreases  in  times  of  depression,  but  compara- 
tive figures  are  of  little  utility.  Changes  in  the  nature  of  the 
securities  which  are  being  offered  are  of  significance,  as  the 
issuance  of  highly  speculative  securities  usually  marks  the  close 
of  a  period  of  prosperity.  But  in  the  main,  the  trend  of  new 
security  issues  serves  chiefly  to  substantiate  opinions  already 
reached  as  to  the  course  of  economic  developments. 

One  reason,  perhaps,  why  new  security  issues  have  failed  to 
prove  of  greater  barometric  value  has  been  the  haphazard 
method  in  which  the  statistics  have  been  compiled,  an  objec- 
tion which  applies  with  even  greater  force  with  reference  to  the 
record  of  new  incorporations.  It  is  encouraging  to  note  that 
a  more  thorough  presentation  of  these  statistics  has  just  been 
started.9 

9 By  the  Commercial  and  Financial  Chronicle   (N.  Y.),  as  explained  in  vol. 
112,  No.  2909,  p.  1216. 


Chapter  X 

BAROMETERS  OF  THE  EXCHANGES 

Function  of  the  exchanges. — The  true  function  of  the  ex- 
changes is  to  provide  a  meeting-place  for  buyers  and  sellers. 
This  applies  to  all  the  exchanges  whether  stock,  commodity, 
or  foreign  currencies.  The  facilities  provided  by  the  exchanges 
enable  buyers  and  sellers  to  consummate  transactions  through 
methods  which  seem  inexplicable  to  the  layman.  At  least  one 
method — short-selling,  or  legitimately  marketing  what  the 
seller  does  not  possess — is  analogous  to  the  fourth  dimension 
in  mathematics.  Through  the  use  of  "futures,"  transactions 
may  be  arranged  covering  engagements  to  be  entered  into 
twelve  months  hence. 

Traders  on  all  exchanges  constantly  endeavor  to  discount 
the  future.  Present  conditions  are  ever  being  analyzed  to 
the  end  that  future  tendencies  may  be  predetermined.  So  it 
is  that  prices  are  seldom  abruptly  disturbed  by  important 
economic  developments.  The  official  announcement  of  the 
total  crops  each  year  by  the  Department  of  Agriculture  is 
usually  without  effect,  although  no  factor  has  a  greater  influ- 
ence upon  conditions  than  agricultural  production,  because  the 
commercial  world  has  kept  in  close  touch  with  the  prospective 
harvests  during  the  growing  season,  and  has  discounted  the 
actual  results. 

From  a  barometric  standpoint,  interest  does  not  center  in 
the  exchanges  as  stabilizers  of  prices,  but  as  discounters  of 
the  future.  Nowhere  in  business  does  the  ability  to  foretell 
economic  developments  receive  richer  reward  than  on  the  ex- 
changes. Market  prices  on  the  exchanges  are  always  where 
the  consensus  of  opinion  of  the  majority  of  people  interested, 
and  this  includes  the  best-posted  men  in  commerce,  places  them. 
Otherwise  prices  would  immediately  rise  or  fall  as  traders 
backed  their  judgment  in  subsequent  transactions  until  the 
proper  level  was  reached.  Prices  on  the  exchanges  can  never 
be  too  high  or  too  low  in  the  opinion  of  a  majority  of  the 
people  as  it  is  the  opinion  of  the  majority  of  the  people  that 
makes  them  what  they  are. 

164 


BAROMETERS  OF  THE  EXCHANGES        165 

Relation  of  the  individual  opinion  to  the  majority  opinion. 
— The  opinion  of  an  individual  on  the  exchanges  may  differ 
from  that  of  the  majority,  but  sight  should  not  be  lost  of  the 
fact  that  the  majority  opinion  does  not  solely  determine  the 
market  price.  Prices  are  the  consensus  of  opinion  which  is 
really  the  majority  opinion  as  qualified  by  the  minority,  or, 
more  accurately,  the  equilibrium  between  all  opinions.  No 
single  opinion  which  finds  expression  in  a  transaction  upon  the 
exchanges  is  without  its  effect. 

A  method  of  thus  measuring  the  consensus  of  opinion  of 
the  best-informed  persons  as  to  future  development  should 
therefore  have  considerable  barometric  value.  One  should 
have  to  be  egotistical  indeed  to  be  guided  solely  by  his  own 
judgment  of  the  future  before  carefully  considering  the  opin- 
ions of  others.  The  operations  of  the  exchanges  provide  an 
opportunity  for  keeping  in  touch  with  outside  opinion. 

THE  STOCK  EXCHANGES 

Transactions  on  the  stock  exchanges. — Discussion  of  the 
operations  of  the  stock  exchanges  will  be  confined  to  the  New 
York  Stock  Exchange  as  it  is  the  largest  of  the  American 
exchanges  and  the  volume  of  transactions  greatly  exceeds  the 
combined  total  of  all  other  American  stock  exchanges. 

Stock  exchange  transactions  act  as  criteria  of  business  con- 
ditions from  two  aspects,  namely,  the  volume  of  sales  and  the 
market  prices.  Although  the  number  of  actual  buyers  must 
always  equal  the  number  of  actual  sellers,  it  is  none  the  less  a 
fact  that  at  times  buyers  are  in  the  majority  and  at  other  times 
sellers  predominate.  Of  course  what  is  meant  is  that  pros- 
pective buyers  exceed  in  number  prospective  sellers,  or  vice 
versa.  When  prospective  buyers  predominate,  prices  naturally 
advance  and  create  what  is  known  as  a  "bull"  movement; 
when  prospective  sellers  are  in  the  majority,  prices  fall  and 
a   "bear"   movement  exists.1 

The  volume  of  transactions. — In  a  period  of  activity  busi- 
ness profits  increase.  As  the  market  price  of  corporate  stocks 
is  determined  chiefly  by  the  earning  power,  present  and  pros- 
pective, of  the  company,  any  circumstances  which  promise  to 

1  The  etymology  of  the  terms  "bull"  and  "bear"  is  significant:  a  bull  is  an 
animal  with  a  proclivity  to  elevate  objects;  a  bear  is  more  inclined  to  tear 
things  down. 


166 


BUSINESS  FORECASTING 


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BAROMETERS  OF  THE  EXCHANGES        167 

result  in  increased  earnings  cause  the  stock  to  advance  in  price 
not  when  the  profits  are  actually  realized  but  as  soon  as  the 
circumstances  are  known.  In  the  preceding  period  of  inac- 
tivity, decreased  earnings  caused  stock  prices  to  fall  and  acted 
as  a  deterrent  both  to  prospective  purchasers  and  sellers.  As 
has  previously  been  shown  in  describing  the  cycle  of  business, 
the  factors  which  cause  depression  to  be  prolonged  eventually 
work  out  their  own  salvation  and  the  darkest  hour  of  the 
period  is  usually  shortly  before  the  morning  of  business  re- 
covery. Traders  on  the  exchanges  are  quick  to  observe  the 
first  tinges  of  gray  in  the  business  horizon  and  a  buying  move- 
ment ensues  which  is  well  under  way  before  the  actual  im- 
provement in  business  becomes  appreciable.  In  the  same  man- 
ner, the  end  of  a  period  of  prosperity  is  foreseen  and  the 
tendency  is  for  the  volume  of  sales  to  decline  at  a  time  when 
business  is  apparently  most  active. 

TABLE  No.  59.— NUMBER  AND  AVERAGE  PRICE  OF  SHARES  SOLD  AT 
NEW  YORK  STOCK  EXCHANGE,  1897-1920* 

Year                                                            Number  of  shares  Average  price 

(per  cent  of  par) 

1897 77,324,000  67.0 

1898 112,699,000  72.7 

1899 176,421,000  78.6 

1900 138,380,000  69.2 

1901 265,944,'JOO  79.0 

1902 188,503,000  79.9 

1903 161,102,000  73.2 

1904 187,312,000  69.9 

1905 263,081,000  87.3 

1906 284,293,000  94.2 

1907 195,43S,000  85.8 

1908 197,206,000  86.6 

1909 214,632,000  97.5 

1910 164,051,000  96.2 

1911 127,208,000  95.8 

1912 131,128,000  97.7 

1913 83,470,000  96.2 

1914 47,900,000f  93.2 

1915 173,145,000  85.1 

1916 233,311,000  93.8 

1917 1S5  628,000  91.2 

1918 144,118,000  92.8 

1919 316,787,000  90.0 

1920 226,640,000  83.6 

♦From  The  Commercial  and  Financial  Chronicle   (N.  Y.),  V,  112,  No.  2899, 
p.  205. 
t  Stock  exchange  closed  from  July  30  to  December  12,  1914. 


168  BUSINESS  FORECASTING 

Stock  exchange  prices. — The  prices  on  the  exchanges,  as 
has  been  said,  represent  a  consensus  of  opinion  on  the  part  of 
the  general  public  as  to  the  present  value  of  the  securities.2 
Prospective  earnings  are  always  more  important  than  current 
earnings  in  determining  prices.  Even  in  periods  of  depression 
when  current  earnings  are  low,  the  prospect  that  earnings  will 
increase  in  the  not  distant  future  causes  stock  prices  to  ad- 
vance; and  in  periods  of  prosperity,  when  current  earnings  are 
exceptionally  large,  the  probability  of  smaller  earnings  in  the 
future  causes  prices  to  decline. 

Industrial  stock  prices  are  most  significant. — Of  the  three 
classes  of  stocks — rails,  utilities,  and  industrials — the  indus- 
trials are  of  greatest  barometric  value.  This  is  because  the 
earnings  of  this  class  fluctuate  in  close  accordance  with  busi- 
ness conditions.  Utility  earnings  have  too  large  an  element 
of  stability  irrespective  of  changing  conditions,  and  railroad 
earnings  are  open  to  the  same  objections  although  in  a  smaller 
degree.  An  improvement  in  business  conditions  means  a  cor- 
responding improvement  in  the  earnings  of  industrial  com- 
panies, and,  by  the  same  token,  a  betterment  in  the  price  of 
industrial  stocks.  A  depression  in  business  adversely  affects 
industrial  earnings  and  causes  industrial  stock  prices  to  decline. 
But  of  especial  barometric  interest  is  the  fact  that  the  trend 
in  the  prices  of  the  stocks  usually  precedes  the  trend  in  con- 
ditions because  of  the  constant  endeavor  of  the  market  to 
predetermine  developments.  The  men  who  are  in  closest 
touch  with  current  conditions  sense  the  change  before  it  actu- 
ally comes  and  the  stock  market  reflects  their  opinion.3 

Although  the  trend  of  industrial  stock  prices  moves  ahead 
of  the  trend  in  general  conditions,  it  is  nevertheless  an  effect 
and  not  a  cause  of  the  improvement  or  depression  that  it 
precedes. 

2  "The  market  is  not  like  a  balloon  plunging  hither  and  thither  in  the  wind. 
As  a  whole,  it  represents  a  serious,  well  considered  effort  on  the  part  of  far- 
sighted  and  well-informed  men  to  adjust  prices  to  such  values  as  exist  or  which 
are  expected  to  exist  in  the  not  too  remote  future." — "The  ABC  of  Stock  Specu- 
lation," S.  A.  Nelson,  p.  44. 

3  The  writer  inclines  to  the  opinion  that  the  list  of  industrial  stocks  repre- 
sented in  the  average  price  indexes  compiled  by  the  leading  periodicals  is  not 
well  chosen  for  barometric  purposes.  The  companies  which  are  first  affected  by 
changing  conditions  are  those  which  supply  raw  materials  and  producers'  goods. 
On  this  basij  the  following  list  of  ten  industrial  common  stocks  is  suggested: 
United  States  Steel,  General  Electric,  American  Locomotive,  American  Wool, 
Kennecott  Copper,  International  Paper,  American  Hide  and  Leather,  Allis- 
Chalmers,  National  Lead,  and  United  States  Rubber, 


BAROMETERS  OF  THE  EXCHANGES        169 


1j 

11                                                          ■   u 
-                u,                 oi                 -o                 co                <o                o 
o               o                o               o                o                o               o 

o 
3 

RECOVERY 

1897 

1898 

8? 

1899 

<-< 

i 

PROSPERITY 

1900 

1901 

a 

1902 

1903 

1904 

1905 

—  o  — 

o 

G 
•JO 

1906 

MAJOR   CRISIS 

1907 

H 

o 

DEPRESSION 

1908 

i 

1 

RECOVERY 

1909 

CO 

•-J 

*      o 

PROSPERITY 

1910 

1911 

1 

1912 

1914 

1915 

19T6 

1917 

1918 

1919 

UAJOR   CRISIS 

1920 

1 

DEPRESSION 

122JU 

170 


BUSINESS  FORECASTING 


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BAROMETERS  OF  THE  EXCHANGES        171 

One  of  the  great  difficulties  in  forecasting  is  to  differentiate 
between  cause  and  effect.  Few  developments  in  financial  cir- 
cles— Wall  Street,  Lombard  Street,  or  elsewhere — are  causes 
of  changes  in  business  conditions.  What  happens  on  the  ex- 
changes is  an  effect  of  what  has  happened  or  will  happen  else- 
where, and  not  a  cause.  Stock  exchange  transactions  do  not 
offer  an  independent  field  for  fundamental  barometric  re- 
search as  in  themselves  they  comprise  a  composite  result  of 
barometric  surveys  made  precisely  along  the  lines  indicated 
in  the  present  volume.  They  are  valuable  solely  as  represent- 
ing the  general  opinion  as  to  the  course  of  events,  and  not  as 
a  factor  with  direct  influence  upon  succeeding  developments. 

The  stock  exchange  as  a  business  barometer. — Stock  ex- 
change transactions  serve  as  a  barometer  both  in  the  volume  of 
sales  and  the  trend  of  prices.  An  increase  in  the  number  of 
shares  traded  in  daily  during  a  period  of  business  depression 
indicates  that  recovery  in  general  business  conditions  is  not 
far  distant.  A  decrease  in  the  number  of  shares  traded  in 
daily  during  a  period  of  prosperity  signifies  that  reaction  in 
business  conditions  may  be   expected. 

The  prices  of  industrial  stocks  have  a  greater  significance 
than  prices  of  the  rails,  or  the  utilities,  or  combined  average 
prices.  This  is  because  of  the  tendency  of  industrial  earnings 
to  follow  the  general  trend  of  business  conditions  more  closely 
than  do  the  others.  As  the  stock  exchange  endeavors  to  dis- 
count the  future,  an  advance  in  prices,  especially,  as  has 
been  said,  of  industrial  stocks  during  a  period  of  depression 
foreshadows  a  resumption  of  commercial  activity;  and  a  de- 
cline in  prices  during  a  period  of  activity  presages  a  downward 
swing  of  the  business  cycle  in  the  near  future.4 

*  "In  the  long  run,  the  course  of  stock  exchange  prices  is  governed  by  future 
prospects.  At  times — for  comparatively  short  intervals,  but  long  enough  to  be 
deceptive  unless  correctly  interpreted — the  course  of  the  market  has  its  major 
influence  in  the  mood  of  the  community  which  may  be  haphazard  pessimism  or 
optimism  rather  than  reasoned  despondency  or  cheerfulness.  The  distinction 
is  sometimes  important  because  the  spirit  of  pessimism,  when  it  gains  absolute 
control,  paints  everything  in  the  news  with  a  gloomy  color.  Visible  increase  in 
railway  traffic  over  preceding  months  suggests  only  the  unfavorable  contrast 
with  a  year  ago.  An  order  for  decrease  of  railway  wages  calls  forth  only  the 
comment  first,  that  the  reduction  should  have  been  larger,  and,  second,  that  the 
laborers  will  strike  against  it.  Much  larger  consumption  of  cotton,  officially 
reported,  merely  drives  Wall  Street  to  renewed  examination  of  the  large  figures 
of  unsold  supplies;  movement  of  foreign  exchange  in  favor  of  New  York  is 
construed  as  evidence  of  progressively  worse  conditions  abroad;  reduction  of 
the  Reserve  Bank  rate  is  dismissed  as  testimony  to  idleness  of  capital  in  a  pros- 
trated state  of  industry,  and  so  on." — Alexander  D.  Noyes  in  The  Neiv  York 
Times,  June  20,  1921. 


172  BUSINESS  FORECASTING 

THE  COMMODITY  EXCHANGES 

Transactions  on  the  Commodity  Exchanges. — Transac- 
tions on  the  commodity  exchanges  differ  in  many  respects  from 
those  on  the  stock  exchanges.  Hedging  operations  cause  many 
transactions  to  be  consummated,  irrespective  of  price,  in  order 
that  business  men  may  protect  their  regular  commercial  profit 
from  loss  through  price  fluctuations  while  commodities  are  in 
their  possession.  What  is  termed  "short-selling"  on  the  stock 
exchanges  is  termed  dealing  in  "futures"  on  the  commodity 
exchanges.  No  overhead  expense  is  incurred  in  carrying 
securities  (except  dividends  on  short  sales)  as  happens  in  the 
case  of  commodities,  and  this  factor  tends  to  make  confus- 
ing the  spread  between  "spot"  and  "future"  prices  on  the 
commodity  exchanges. 

At  first  thought,  prices  of  "futures"  seem  to  have  a  greater 
barometric  value  than  "spot,"  or  present,  prices.  As  is  shown 
in  Table  No.  61,  the  daily  quotations  of  the  cotton  exchanges 
give  prices  not  only  for  the  current  month  but  for  the  succeed- 
ing eleven  months  as  well.  As  a  matter  of  fact  the  future 
prices  are  dependent  chiefly  upon  the  present  price,  and  any 
change  in  the  current  quotation  is  immediately  reflected  in  the 
future  prices. 

TABLE  No.  61.— CLOSING  PRICES  ON  THE  NEW  YORK  COTTON 

EXCHANGE,  JUNE  10,  1921* 

(Middling  upland) 

Cents 

Spot    12.50 

Futures: 

July   (1921)    12.35 

August   (1921)  12.63 

September    (1921)    12.94 

October  ( 1921 )    13.14 

November   (1921)   13.38 

December    (1921)    13.63 

January  (1922)  13.73 

February  (1922)    13.86 

March  (1922)    14.00 

April    (1922)    14.12 

May   (1922)    14.25 

*  The  Commercial  and  Financial  Chronicle  (N.  Y.),  V.  112,  No.  2920, 
p.  2550. 

The  spread,  or  difference,  between  present  and  future  prices 
is  due  to  the  cost  of  carrying  the  commodities  between  the  har- 


BAROMETERS  OF  THE  EXCHANGES       173 

vests.  The  carrying  cost  includes  interest  on  the  money  in- 
vested, storage  charges,  and  insurance  premiums,  all  of  which 
must  be  added  to  the  current  price.5 

Future  prices  depend  therefore  upon  present  prices  on  the 
commodity  exchanges.  Present  prices,  however,  are  affected 
chiefly  by  future  conditions.6 

The  commodity  exchanges  as  business  barometers. — The 
ability  of  men  in  business  to  foretell  the  future  has  its  best 
exemplification  on  the  commodity  exchanges.  The  small  per- 
centage of  ignorant  traders  is  in  distinct  contrast  to  the  large 
number  who  operate  on  the  stock  exchanges.  Traders  on  the 
commodity  exchanges  are  well-informed  men  who  do  not  act  be- 
fore they  have  made  a  careful  analysis  of  each  influencing  fac- 
tor. They  fully  appreciate  the  law  of  causality  and  realize  that 
what  will  happen  in  the  future  depends  upon  what  occurs  in  the 
present.  To  this  end  they  maintain  extensive  organizations 
the  purpose  of  which  is  to  keep  fully  informed  of  every  fac- 
tor, however  minute,  which  may  affect  the  situation. 

The  fact  that  the  prices  of  the  commodities  which  are  most 
extensively  dealt  in  on  the  exchanges — cotton,  wheat,  corn, 
sugar,  coffee,  copper,  etc. — are  the  first  to  be  affected  when 
prices  change  has  been  referred  to  previously.  This  is  not 
due  to  fortuitous  circumstance  but  is  chiefly  attributable  to 
the  ability  of  the  traders  to  foretell  the  trend  of  conditions. 
Prices  rise  and  fall  in  accordance  with  conditions  of  demand 
and  supply.  The  commodity  exchanges  watch  both  factors 
closely  as  they  change  from  day  to  day  and  cause  prices  to 
change  in  accordance  with  the  relative  balance  and  lack  of 
balance  between  the  two.     The  .producers  endeavor  to  regulate 

""But  it  will  be  asked,  why  should  July  (1911)  wheat  be  sold  at  93l  cents, 
when  May  wheat,  representing  an  earlier  month,  sells  on  the  same  day  at 
$1.04|?  Here  it  must  be  remembered  that  these  prices,  besides  including  the 
expense  items  just  mentioned,  must  also  reflect  the  discounting  process  which 
speculators  always  have  in  mind  when  selling  grain  for  future  delivery.  Con- 
sequently, we  find  dealers  on  October  10,  1910,  selling  wheat  for  delivery  in 
July,  1911,  and  in  doing  so  they  are  already  looking  towards  next  year's  crop, 
which  begins  to  come  on  the  market  in  July,  whereas  May  wheat  has  reference 
to  the  old  crop  harvested  in  1910." — "American  Produce  Exchange  Markets," 
S.  S.  Huebner,  in  The  Annals,  V.  XXXVIII,  No.  2,  p.  7. 

*  "The  markets  of  the  world,  whether  in  coffee  or  cotton  or  anything  else,  go 
more  by  the  prospects  and  by  the  probable  future  production  than  by  the  imme- 
diate supply." — Testimony  of  Herman  Sielcken,  of  Crossman  &  Sielcken,  the 
largest  dealers  in  green  coffee  in  America,  before  Pujo  Committee. — "Money 
Trust  Investigation,"  Part  I,  p.  59. 


174  BUSINESS  FORECASTING 

the  supply  to  meet  the  demand,  and  the  traders  on  the  com- 
modity exchanges  "keep  the  score." 

Prices  on  the  commodity  exchanges  are  therefore  of  parti- 
cular barometric  importance.  Prices  move  in  sequence,  from 
raw  materials  to  finished  products  to  wholesale  prices  to  retail 
prices  to  wages,  and  almost  invariably  the  beginning  is  in  the 
commodity  markets.  Prices  on  the  commodity  exchanges 
have  a  double  significance.  They  represent  the  opinion  of 
the  best-posted  men  in  the  country  as  to  future  developments. 
But  even  more  important,  in  the  money  economy  of  modern 
commerce,  they  indicate  whether  business  conditions  will  be 
prosperous  or  otherwise,  in  foretelling  whether  general  prices 
will  rise  or  fall. 

Tables  Nos.  62  to  70  show  the  trend1  of  prices  on  the  com- 
modity exchanges  from  1911  to  1920.  It  will  be  noted  that 
metal  prices  lag  behind  those  of  agricultural  products. 

FOREIGN  EXCHANGES 

The  function  of  Foreign  Exchange. — The  term  foreign 
exchange  means  the  exchange  of  foreign  currencies.7  Ameri- 
can purchases  abroad  must  be  paid  for  in  the  currency  of  the 
selling  nation,  and  accordingly  dollars  must  be  exchanged  for 
francs,  lira,  or  as  the  case  may  be.  American  sales  abroad 
must  be  eventually  paid  for  in  dollars  which  requires  that 
foreign  purchasers  exchange  their  currency  for  dollars.  Under 
ordinary  circumstances,  a  charge  is  imposed  for  the  service 
which  is  limited  by  the  cost  of  actually  shipping  gold  which, 
regardless  of  the  die  stamp,  is  international  currency.  The 
amount  of  the  charge — which  strange  to  say  is  sometimes  a 
credit — depends  upon  the  relationship  between  the  demand  for 
the  particular  currency  at  <a  given  place  and  the  supply  which 
is  available  at  that  location.  Demand  and  supply,  in  turn, 
are  normally  predicated  upon  the  volume  of  merchandise  ship- 
ments between  the  two  countries. 

Effect  upon  domestic  conditions. — When  a  charge  is  made 
for  the  exchange  of  currencies,  the  currency  being  offered  in 
exchange  is  said  to  be  at  a  discount;  when  a  credit  is  received, 

T  Foreign  exchange  operations  are  conducted  in  this  country  without  a  common 
meeting  place  of  buyers  and  sellers.  Practically  all  transactions  are  completed 
over  the  telephone.  The  banks  are  analogous  to  retailers  and  the  wholesalers 
are  a  comparatively  small  number  of  dealers  of  whom  in  New  York  City  less 
than  twenty-five  are  of  importance. 


BAROMETERS  OF  THE  EXCHANGES        175 

the  currency  is  at  a  premium.  A  small  discount  is  relatively 
unimportant  but  large  discounts — such  as  have  existed  in  the 
United  States  since  the  close  of  the  World  War — seriously 
handicap  trade.  The  loss  through  depreciated  currency  causes 
nations  to  stop  trading  with  nations  whose  currency  is  at  a  large 
premium.  Consequently  the  large  discount  on  foreign  cur- 
rencies in  the  United  States  has  been  one  of  the  factors  which 
have  adversely  affected  the  international  commerce  of  this 
country.  A  betterment  in  the  exchange  rates  on  foreign  cur- 
rencies, i.e.,  a  smaller  discount,  must  have  a  beneficial  effect 
upon  American  exports  and  incidently,  American  industry. 

Causes  of  fluctuations  in  foreign  exchange. — The  par  of 
international  currencies  is  determined  by  the  relative  gold 
content  of  the  monetary  units.  The  par  of  the  pound  sterling 
in  the  United  States  is  $4.8665  because  there  is  4.8665  times 
as  much  pure  gold  in  the  pound  sterling  as  in  the  American 
dollar;  the  par  of  the  French  franc  and  Italian  lire  is  19.3c 
because  the  gold  in  the  franc  or  the  lire  is  worth  19.3c  in 
American  money.  European  currencies  are  no  longer  redeem- 
able in  gold,  and  the  premium  on  the  American  dollar  in  those 
countries — which  is  the  reciprocal  of  the  discount  on  the  Eu- 
ropean currencies  in  this  country — reflects  the  premium  on 
gold  in  Europe  rather  than  the  merchandise  trade  which 
ordinarily  determines  the  premium  or  discount. 

Another  factor  which  has  had  large  influence  upon  exchange 
rates  since  the  close  of  the  World  War  is  speculation.  The 
discounts  on  many  foreign  currencies  offered  large  potential 
profits  in  the  event  of  any  substantial  recovery  and  attracted 
a  multitude  of  speculators.  Speculation  in  foreign  exchange 
has  proved  a  most  unfortunate  development  because  of  the 
relative  inability  of  the  speculators  to  form  an  intelligent  opin- 
ion upon  which  to  base  their  commitments. 

Foreign  Exchange  as  a  business  barometer. — Foreign  ex- 
change rates  under  present  conditions  are  of  chief  barometric 
value  as  indicia  of  foreign  conditions.  Permanent  advances 
in  rates  reflect  improved  conditions  in  the  countries  affected, 
whereas  stable  or  lowering  rates  signify  no  betterment.  Daily 
fluctuations  are  without  especial  significance  as  they  are  chiefly 
due  to  speculative  operations.  Domestic  industry  will  bene- 
fit from  higher  exchange  rates  since  foreign  purchasers  will 
be  encouraged  thereby  to  buy  in  this  country. 


176 


BUSINESS  FORECASTING 


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BAROMETERS  OF  THE  EXCHANGES 

CHART  XXIII.— TREND  OF  WHEAT  PRICES:  1910-1920. 


WHEAT   (No.   2  Red,  bu.)   (ft) 


179 


1.50 

1.30 

1.10 

.90 


1911       12         13  14         15  16  17  18  19  20 

CHART  XXIV.— TREND  OF  CORN  PRICES:  1910-1920. 
CORN  (Contract  prioe  per  bu.  Chicago)   (ft) 


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CHART  XXV.— TREND  OF  COTTON  PRICES:  1910-1920. 
COTTON  (Middling  uplands,  lb.)   (cents) 


180 


BUSINESS  FORECASTING 


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BAROMETERS  OF  THE  EXCHANGES        183 


CHART  XXVI.— TREND  OF  WOOL  PRICES:  1910-1920. 

WOOL  (O.Pa.&W.Va.Delaine  Untfashed,^  lb.  at  Boston) 


100" 

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1911         12         IS         14         15         16         17         18         19         20 

CHART  XXVII— TREND   OF  COFFEE  PRICES:   1910-1920. 
COFFEE   (No.  7  Rio,  lb.)   (cents) 


at 

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184 


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BAROMETERS  OF  THE  EXCHANGES        185 


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BAROMETERS  OF  THE  EXCHANGES 

CHART  XXIX.— TREND  OF  RUBBER  PRICES:   1910-1920. 
RUBBER   (Up-river,    fine,   lb.) ($) 


187 


*16l 


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CHART  XXX.— TREND   OF  PIG-IRON   PRICES:   1910-1920. 
PIG  IRON    (No.   2X,   Phila.   ton)    (8) 


1911       12         13         14         15         16-  "-17  IS  19 

CHART  XXXI.— TREND  OF  COPPER  PRICES:   1910-1920. 
COPPER  (Lake.  N.Y.,   lb.)   (cents) 


17  18  19  20 


Chapter  XI 

BAROMETERS  OF  FINANCE 

Financial  barometers. — Financial  barometers  are  five  in 
number.  The  total  bank  clearings  of  a  nation  which  transacts 
the  largest  part  of  its  business  transactions  through  the  pay- 
ment with  checks — as  is  the  case  in  the  United  States — afford 
a  means  of  judging  the  relative  commercial  activity  of  the 
country  at  any  given  time.  The  bank  statements  disclose  the 
condition  of  the  financial  institutions  upon  which  the  business 
world  depends  for  credit — a  prime  necessity  in  modern  busi- 
ness. Interest  rates  reflect  the  condition  of  the  so-called 
money  market,  which  is  in  reality  a  credit  market.  Interna- 
tional gold  movements  are  highly  significant  as  a  criterion 
both  of  credit  conditions  at  home  and  general  conditions 
abroad.  The  fiscal  operations  of  the  United  States  Govern- 
ment, in  view  of  the  enormous  debt  created  during  the  war, 
have  become  an  influencing  factor  of  large  importance  upon 
general  business  conditions  in  this  country. 

BANK  CLEARINGS 

Meaning  of  the  term. — About  85  per  cent  of  the  payments 
made  in  the  United  States  are  handled  through  the  use  of 
checks.1  A  certain  share  of  these  checks — not  over  10  per 
cent — are  deposited  in  the  banks  upon  which  drawn.  The 
great  majority,  however,  are  deposited  in  other  banks  for  col- 
lection. For  mutual  convenience,  local  banks  in  various  local- 
ities have  established  clearing-houses  to  which  they  send  all 
local  checks.  The  total  volume  of  checks  cleared,  i.e.,  pass- 
ing through  the  clearing-house,  indicates  the  relative  business 
activity  of  the  community.     The  aggregate   for  all  clearing- 

1  "The  ABC  of  the  Federal  Reserve  System,"  E.  W.  Kemmerer,  p.  9. 

188 


BAROMETERS  OF  FINANCE 


189 


190  BUSINESS  FORECASTING 

houses  would  reflect  the  activity  of  the  nation.2  Local  checks, 
i.e.,  checks  deposited  in  the  same  city  in  which  they  were  drawn, 
comprise  about  75  per  cent  of  the  total  checks.3  Out-of-town 
checks,  during  the  past  few  years,  have  been  handled  through 
the  Federal  Reserve  Clearing  System.  The  term  bank  clear- 
ings therefore  includes  all  checks  deposited  in  the  same  local- 
ity where  drawn  but  not  in  the  same  bank  upon  which  drawn, 
for  the  principal  cities  of  the  country.  The  total  is  approxi- 
mately 65  per  cent  of  all  checks  drawn  in  the  country,  and 
represents  between  50  and  60  per  cent  of  the  total  volume  of 
business. 

Significance  of  New  York  City  clearings. — The  custom 
has  long  prevailed,  in  using  bank  clearings  as  an  index  of  busi- 
ness activity,  to  eliminate  New  York  City  clearings  from  the 
total.  This  was  due  to  the  effect  of  the  speculative  transac- 
tions on  the  New  York  Stock  Exchange  which  gave  an  untrue 
bias  to  the  clearings  of  the  most  important  commercial  center 
in  the  country.  This  objection,  fortunately  no  longer  obtains, 
at  least  not  to  the  same  extent  as  formerly.  The  operations  of 
the  Stock  Exchange  Clearing-House,  which  started  on  April 
26,  1920,  now  cause  the  bulk  of  the  stock  exchange  transac- 
tions to  be  without  effect  upon  bank  clearings.4  Although  the 
effect  of  speculative  transactions  is  not  entirely  negligible,  it 
no  longer  warrants  the-exclusion  of  New  York  City  clearings 
in  using  bank  clearings  as  a  business  barometer.5 

Barometric  limitations  upon  bank  clearings. — The  fact 
that  bank  clearings  do  not  show  the  entire  business  of  the 
country  is  not  a  handicap  from  a  barometric  viewpoint,  as 
the  volume  represented  is  sufficiently  large  for  the  purpose. 
But  more  important  objections  arise.  In  the  first  place,  a 
change  in  price  levels  affects  the  total  bank  clearings  irrespec- 

2  No  attempt  is  made  to  ascertain  more  often  than  once  a  year  the  total  clear- 
ings for  all  clearing-houses  of  which  199  were  in  existence  on  September  30, 
1920. — "Annual  Report  of  the  Comptroller  of  the  Currency,"  1920,  p.  280.  The 
weekly  report  of  The  Commercial  and  Financial  Chronicle  (N.  Y.)  covered  178 
cities  in  1920.     V.  112,  No.  2899,  p.  204. 

3  The  monthly  average  clearings  for  the  entire  United  States  in  1920  approx- 
imated thirty-nine  billion  dollars;  the  monthly  average  of  the  Federal  Reserve 
Clearing  System — which  handles  out-of-town  checks — in  1920  was  about  thirteen 
billions. 

*  In  conversing  with  the  author,  the  manager  of  the  Stock  Clearing  Corpora- 
tion stated  that  no  definite  figures  had  been  compiled  in  this  respect  but  that 
he  estimated  at  least  60  per  cent  of  the  check  payments  formerly  required  no 
longer  went  through  the  bank  clearings    (June,  1921). 

5  The  Commercial  ami  Financial  Chronicle,  V.  112,  No.  2899,  p.  202. 


BAROMETERS  OF  FINANCE  191 

tive  of  the  volume  of  business  being  done.  Total  bank  clear- 
ings in  the  United  States  in  1919  had  to  be  at  least  as  large 
again  as  in  1913  to  represent  an  equal  volume  of  business. 
And  in  the  second  place,  to  correct  the  bank  clearings  by  ap- 
plying a  current  price 'index  number  gives  unsatisfactory  re- 
sults because  current  clearings  often  represent  engagements 
entered  upon  under  a  former  price  level.  Bank  clearings  do 
not  reflect  changes  in  prices  until  two  to  three  months  later 
because  of  the  time  required  to  fill  contracts  upon  which  the 
price  is  determined  when  the  contract  is  made  -and  not  when 
the  goods  are  delivered,  and  because  of  the  30  to  90  days 
credit  which  is  the  customary  terms  of  sale. 

The  trend  of  bank  clearings. — Subject  to  the  limitations 
just  stated,  bank  clearings  undoubtedly  reflect  existing  condi- 
tions in  commerce.  An  increase  in  business  activity  means 
greater  production  which  in  turn  signifies  a  larger  number  of 
purchases  and  sales,  or,  an  increase  in  the  volume  of  transac- 
tions. As  transactions  are  customarily  settled  with  check 
payments,  the  volume  of  bank  clearings  increases.  The  ef- 
fect is  converse  when  business  activity  diminishes.  As  is  shown 
in  Table  No.  71,  the  bank  clearings  for  the  last  quarter  of 
1915  amounted  to  practically  23  billion  dollars  in  comparison 
with  about  18  billions  during  the  last  quarter  of  1914,  and 
20  billions  during  the  last  quarter  of  1913.  As  prices  were 
substantially  the  same  during  all  three  periods,  the  clearings 
accurately  reflect  the  depression  of  1914  and  the  recovery  of 
1915.6 

The  Federal  Reserve  clearing  system. — The  requirement 
that  all  member  banks  of  the  Federal  Reserve  System  keep 
their  legal  reserves  on  deposit  exclusively  with  the  Federal 
Reserve  banks  entirely  changed  the  method1  of  collecting  out- 
of-town  checks  which  was  formerly  in  vogue.  After  the  banks 
in  the  large  centers  lost  the  deposits  of  the  interior  banks, 
they  were  no  longer  willing  to  act  as  collection  agents  and  the 
Federal  Reserve  banks  were  obliged  to  provide  a  method  which 
is  now  known  as  the  Federal  Reserve  Clearing  System.  Table 
No.  72  shows  the  operations  of  the  system  monthly  since  June 
15,  1919.  Figures  prior  to  that  date  are  without  barometric  in- 
terest because  of  the  smaller  number  of  banks  using  the  system. 

"The  October  1  index  number  of  the  Department  of  Labor  for  each  of  the 
three  years  was  as  follows:  1913,  101;  1914,  99;  1915,  101.— Monthly  Labor 
Reviews,  V.  XII,  No.  5,  p.  38. 


192 


BUSINESS  FORECASTING 


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BAROMETERS  OF  FINANCE  193 

TABLE  No.  72.— OPERATIONS  OF  THE  FEDERAL  RESERVE  CLEARING 

SYSTEM,  1919-1921* 
Month  ended 

1919  Total  checks  cleared 

July  15    $11,362,000,000 

August  IS    11,447,000,000 

September  IS   11,439,000,000 

October  IS    12,572,000,000 

November  15   13,418,000,000 

December  15   12,935,000,000 

1920 

January  15  14,042,000,000 

February  14 12,517,000,000 

March  15   13,154,000,000 

April  15    14,450,000,000 

May  15   12,818,000,000 

June  15    12,841,000,000 

July  15    13,616,000,000 

August  IS  12,301,000,000 

September  IS  12,878,000,000 

October  IS    13,674,000,000 

November  15   13,088,000,000 

December  15    12,090,000,000 

1921 

January  15   12,024,000,000 

February  15   9,899,000,000 

March  15    9,417,000,000 

April   15    10,724,000,000 

May  15    9,319,000,000 

June   15   9,852,000,000 

July  15   9,762,000,000 

August  15  9,188,000,000 

*  Compiled  from  "Federal  Reserve  Bulletin." 

A  combination  of  the  total  clearings  at  the  clearing-houses  with 
the  Federal  Reserve  Clearing  System,  would  cover  practically 
all  local  and  out-of-town  checks.  Unfortunately,  the  Federal 
Reserve  system  has  a  fiscal  month  ending  on  the  15th  in  con- 
trast to  the  practice  of  combining  the  clearing-house  returns 
weekly. 

Bank  clearings  as  a  business  barometer. — Bank  clearings 
are  not  so  good  a  barometer  of  business  as  is  generally  be- 
lieved. Barometric  limitations  are  caused  by  changes  in  price 
levels,  and  the  time  intervening  between  the  making  of  a  busi- 
ness transaction  and  the  date  of  payment.  But  of  chief  im- 
portance is  the  tendency  of  clearings  to  follow  after  the  trend 
in  business.  Bank  clearings  show  accurately  how  business 
has  been  in  the  immediate  past,  but  offer  little  assistance  in 
determining  how  it  will  be  in  the  immediate  future. 


194  BUSINESS  FORECASTING 

BANK   STATEMENTS 

Statements  according  to  classification. — The  bank  state- 
ments which  are  of  chief  barometric  significance  are:  (1)  the 
weekly  statement  of  the  combined  Federal  Reserve  banks;  (2) 
the  weekly  statement  of  the  reporting  member  banks  of  the 
Federal  Reserve  system;  and  (3)  the  bi-monthly  statement  of 
condition  of  the  combined  national  banks.  The  total  number 
of  banks  in  the  United  States  on  June  30,  1920,  which  reported 
to  the  Comptroller  of  the  Currency  was  30, 1 5 1 .7  Of  this  num- 
ber 12  were  Federal  Reserve  banks,  18,195  were  State  banks, 
620  mutual  savings  banks,  1,087  stock  savings  banks,  1,408 
loan  and  trust  companies,  799  private  banks,  and  8,030  were 
national  banks.  The  Federal  Reserve  system,  in  addition  to 
the  12  Federal  Reserve  banks,  includes  approximately  10,000 
of  the  above-mentioned  banks.8 

Relative  importance  of  different  classes. — The  relative  im- 
portance of  the  principal  classes  of  banks  is  shown  in  Table 
No.  73.  The  loans  and  investments  of  the  reporting  member 
banks  of  the  Federal  Reserve  system  are  about  the  same  as  for 
all  national  banks,  and  are  about  40  per  cent  of  the  total  for 
the  country.9  The  Federal  Reserve  system  embraces  about  60 
per  cent  of  the  banking  power  of  the  country. 

The  weekly  Federal  Reserve  statement. — The  weekly  Fed- 
eral Reserve  statement  reflects  the  condition  of  the  Federal 
Reserve  system  which  comprises  about  60  per  cent  of  the  bank- 
ing facilities  in  the  United  States. 

At  the  close  of  business  on  Wednesday  of  each  week,  the 
twelve  reserve  banks  telegraph  to  Washington  a  statement  of 
resources  and  liabilities.  A  consolidated  statement  is  then 
prepared  and  appears  in  the  newspapers  on  Friday,  two  days 
later,  as  is  shown  in  Table  No.  74.  The  significant  items  in 
the  statement  are  shown  in  the  table  in  distinctive  type,  a  prac- 
tice which  unfortunately  is  not  followed  by  the  Board  or  by 
the  newspapers.     The  items  on  the  statement  have  been  num- 

7  "Annual  Report  of  the  Comptroller  of  the  Currency,"  1920,  p.  252. 

8  All  National  banks  must,  and  other  banks  may,  be  members  of  Federal 
Reserve  system.  The  exact  number  of  member  banks  on  March  31,  1921,  was 
9,715.     "Federal  Reserve  Bulletin,"  V.  7,  No.  5,  p.  614. 

9  About  800  of  the  larger  member  banks  of  the  Federal  Reserve  system  each 
week  report  to  the  Federal  Reserve  Board.  The  reporting  member  banks  in- 
clude trust  companies  as  well  as  national  banks,  and  it  is  a  coincidence  that  the 
total  for  the  reporting  member  banks  approximates  the  total  for  all  national 
banks. 


BAROMETERS  OF  FINANCE 


195 


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196  BUSINESS  FORECASTING 

bered  for  convenience  in  reference.     Of  major  interest  are: 
(7)    total  cash  reserves;     (11)    total  bills  discounted;  (23) 
member  banks-reserve  account;   (26)   Federal  Reserve  notes 
in  circulation;  and  (30)  reserve  ratio.  , 

Cash  reserves. — The  Federal  Reserve  banks  are  required 
to  maintain  a  reserve  of  at  least  40  per  cent  in  gold  against 
Federal  Reserve  notes  in  circulation,  and  of  at  least  35  per 
cent  in  lawful  money  against  deposit  liabilities.  The  amount 
of  cash  reserves  therefore  imposes  a  limitation  upon  the  credit 
availability  in  the  Federal  Reserve  system,  a  point  which  will 
presently  receive  further  elucidation. 

It  will  be  noted  that  practically  the  entire  reserve  is  in  gold. 
Total  gold  reserves  of  $2,445,568,000  on  June  15,  1921 
marked  a  new  high  record  for  the  Federal  Reserve  banks  as 
may  be  seen  from  Table  No.  75  which  shows  the  total  gold 
holdings  monthly  from  the  organization  of  the  banks.  In 
slightly  over  one  year — from  May,  1920  to  June,  1921 — the 
gold  holdings  of  the  reserve  banks  increased  over  $500,000,- 
000.  Under  existing  legislation  in  the  United  States,  one 
dollar  in  gold  serves  as  a  basis  for  about  $28  in  bank  credit.10 
As  the  amount  of  gold  in  the  Federal  Reserve  system  measures 
the  maximum  loaning  power  of  the  banks,  substantial  increases 
and  decreases  such  as  have  been  experienced  since  the  begin- 
ning of  the  World  War  exert  large  influence  upon  the  condi- 
tion of  credit  throughout  the  country. 

Bills  discounted. — One  of  the  principal  reasons  for  the  for- 
mation of  the  Federal  Reserve  banks  was  to  provide  a  means 
of  rediscounting  commercial  paper.  Member  banks  whose 
position  otherwise  would  make  it  inadvisable  to  grant  further 
credits  to  depositors  may  avail  themselves  of  an  opportunity 
to  rediscount  at  the  reserve  banks,  some  of  the  loans  they  are 
already  carrying.  As  the  rediscount  privilege  of  the  reserve 
banks  is  supposed  to  be  used  only  in  emergencies,  the  volume 
of  discounts  shown  in  the  weekly  statement  reflects  the  loan- 
ing condition  of  the  system  as  a  whole.  Previous  to  1921,  this 
was  not  the  case  because  of  the  policy  of  the  Board  in  keeping 
the  discount  rate  under  the  market  rate  of  interest. 

Member  banks'  reserve  account. — As  all  member  banks 
are  required  to  keep  on  deposit  with  the  reserve  banks  a  cash 

10  Member  banks  of  the  Federal  Reserve  system  are  required  to  keep  a  reserve 
which  averages  10  per  cent  of  total  deposits,  with  the  reserve  banks  which  in 
turn  keep  a  reserve  of  35  per  cent  of  the  10  per  cent,  or  3i  per  cent. 


BAROMETERS  OF  FINANCE  197 

TABLE  No.  74.— STATEMENT  OF  THE  CONDITION  OF  THE  COM- 
BINED  FEDERAL  RESERVE  BANKS  ON  JUNE   15,  1921* 

RESOURCES 

1.  Gold  and  gold  certificates $311,017,000 

2.  Gold  settlement  fund 456,211,000 

Total  gold  held  by  banks $767,228,000 

3.  Gold  with  Federal  Reserve  agents 1,550,817,000 

4.  Gold  redemption  fund 127,523,000 

5.  Total  gold  reserves $2,445,568,000 

6.  Legal  tender  notes,  silver,  etc 170,056,000 

7.  Total  cash  reserves $2,615,624,000 

8.  Bills  discounted: 

9.  Secured  by  United  States  Government  obligations $664^96,000 

10.  All  other   1,043,383,000 

11.  Total  bills  discounted $1,707,679,000 

12.  Bills  bought  in  open  market 53,200,000 

13.  Total  bills  on  hand $1,760,879,000 

14.  United  States  Government  obligations  owned 557,954,000 

15.  Total  earning  assets $2,318,833,000 

16.  Uncollected  items    $722,766,000 

17.  All  other  resources $49,956,000 

Total  resources   (7-15-16-17) $5,707,190,000 

LIABILITIES 

18.  Capital  paid  in $102,156,000 

19.  Surplus $202,036,000 

20.  Reserved  for  franchise  tax $39,057,000 

21.  Deposits: 

22.  Government    $14,597,000 

23.  Member  banks — reserve  account 1,866,455,000 

24.  All  other  48,175,000 

25.  Total  deposits   $1,929,227,000 

26.  Federal  Reserve  notes  in  actual  circulation $2,674,435,000 

27.  Federal  Reserve  banknotes — net  liability $135,050,000 

28.  Deferred  availability  items $594,207,000 

29.  All  other  liabilities $31,011,000 

Total  liabilities   (18-19-20-25  to  29) $5,707,179,000 

•Compiled  from  The  Ne<w  York  Times,  June  17,  1921. 


198  BUSINESS  FORECASTING 

Per  cent 

30.  Ratio  of  total  reserves  to  deposit  and  Federal  Reserve  note 

liabilities   combined    56.8 

31.  Ratio  of  gold  reserves  to  Federal  Reserve  notes  in  circulation   after 

setting  aside  35  per  cent  against  deposit  liabilities 72.6 

32.  Ratio  of  reserves  against  deposits  and  notes  in  individual  districts: 

Per  cent  Per  cent 

Boston 68.8  Chicago   54.9 

New  York 60.6  St.  Louis   52.5 

Philadelphia 54.1  Minneapolis   40.3 

Cleveland   61.8  Kansas  City 49.2 

Richmond 43.7  Dallas 38.5 

Atlanta 46.3  San  Francisco 56.4 

*  Compiled  from  the  New  York  Times,  June  17,  1921. 

reserve  which  averages  about  10  per  cent  of  deposits,  the 
amount  in  this  item  approximates  the  same  percentage  of  the 
individual  deposits  at  the  reserve  banks.  As  individual  de- 
posits are  about  equal  to  the  amount  of  loans  and  discounts, 
and  as  the  amount  of  loans  and  discounts  in  the  reserve  banks 
averages  about  60  per  cent  of  the  total  for  the  country,  the 
total  in  the  reserve  account  of  the  member  banks  on  the  weekly 
Federal  Reserve  statement  is  about  6  per  cent  of  the  total 
loans  outstanding  in  the  entire  country. 

Federal  Reserve  notes  in  circulation. — A  second  important 
object  in  the  organization  of  the  reserve  banks  was  to  provide 
an  elastic  currency  which  would  expand  when  the  demands 
of  business  so  required  and  would  contract  when  the  need  no 
longer  existed.  Federal  Reserve  notes  comprise  this  elastic 
currency.  They  are  issued  by  the  reserve  banks  only  upon  the 
request  of  the  business  community,  i.e.,  when  increased  de- 
mands for  credit  cause  member  banks  to  seek  rediscount 
accommodation  at  the  reserve  banks,  and  are  automatically 
retired  when  they  return  to  the  reserve  banks.  As  is  shown 
in  Table  No.  76,  the  volume  of  Federal  Reserve  Notes  in 
circulation  on  June  1,  1921,  exceeded  ail  other  forms  of 
currency  combined. 

In  view  of  the  elasticity  of  the  Federal  Reserve  note  cir- 
culation, the  relative  volume  of  these  notes  which  is  outstand- 
ing at  any  given  time  is  a  fair  criterion  of  current  conditions. 
An  upward  trend  in  the  volume  from  week  to  week  reflects 
greater  business  activity,  whereas  a  downward  trend  indi- 
cates that  activity  is  not  so  great.     Statistics  of  Federal  Re- 


BAROMETERS  OF  FINANCE 


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BAROMETERS  OF  FINANCE  201 

TABLE  No.   76.— MONEY  IN  CIRCULATION   IN  THE  UNITED   STATES 

ON  JUNE  1,  1921* 

Circulating  medium  Amount 

Gold  and  gold  certificates $885,732,861 

Silver  and  silver  certificates 524,207,249 

United  States  Government  notes 336,002,306 

Bank  notes 891,281,092 

Total  excluding  Federal  Reserve  notes $2,637,223,508 

Federal  Reserve  notes 2,782,725,207 

Grand  total   $5,419,948,715 

*  From  "Circulation  Statement,"  June  1,  1921. 

serve  note  circulation  prior  to  1919  are  without  significance, 
as  the  amount  showed  a  continual  upward  movement  from 
the  opening  of  the  system  in  1914.  As  is  shown  in  Table 
No.  77,  the  volume  of  circulation  decreased  materially  dur- 
ing the  early  months  of  1919  which  reflected  the  short-lived 
post-armistice  depression.  From  April,  1919,  to  December, 
1920,  the  increase  was  almost  unbroken.  On  December  23, 
1920,  the  high  record  of  $3,404,931,000  was  reached.  The 
first  half  of  1921  witnessed  a  substantial  decrease  as  the 
volume  of  $2,674,435,000  in  Table  No.  74  attests. 

Reserve  ratio. — The  percentage  which  total  cash  reserves 
(7)  is  of  the  sum  of  total  deposits  (25)  and  reserve  notes 
(26)  is  known  as  the  reserve  ratio  (30).  It  is  obvious  that 
any  change  in  the  reserves,  discounts,  deposits,  or  notes,  of 
the  reserve  banks  affects  the  reserve  ratio.  For  this  reason, 
the  ratio  serves  as  an  index  number  for  each  statement,  and 
it  is  possible  to  observe  the  composite  effect  of  all  influencing 
factors  from  week  to  week  merely  through  watching  the  re- 
serve percentage. 

A  single  percentage  is  used  for  convenience  only.  From 
a  legal  viewpoint,  as  has  been  stated,  two  separate  reserves 
are  required,  one  against  notes  and  another  against  deposits. 
The  legal  minimum  is  a  varying  percentage  between  35  and 
40  depending  upon  the  relative  amount  of  note  and  deposit 
liabilities  outstanding. 

As  a  matter  of  practice,  the  minimum  reserve  ratio — which 
would  indicate  a  satisfactory  condition  of  credit — is  believed 
to  be  about  60  per  cent.  Below  that  is  unsatisfactory,  50  per 
cent  is  the  danger  mark,  and  40  per  cent  the  approximate 
legal  limit.     The  ratio  of  56.8  per  cent  on  June  15,   1921, 


202  BUSINESS  FORECASTING 

TABLE  No.  77.— FEDERAL  RESERVE  NOTES  IN  CIRCULATION  1919-1921 
(in  millions  of  dollars,  weekly  figures) 

Month  19IQ 

January 2,647 

2,590 

2,513 

2,466 

2,450 
February 2,454 

2,468 

2,466 

2,472 
March   2,488 

2,503 

2,510 

2,521 
April   2,547 

2,548 

2,543 

2,549 
May   2,549 

2,556 

2,532 

2,504 

2,519 
June   2,513 

2,499 

2,488 

2,499 
July 2,552 

2,538 

2,512 

2,504 
August   2,506 

2,532 

2,540 

2,553 

2,580 
September   2,611 

2,621 

2,621 

2,655 
October    2,708 

2,741 

2,752 

2,753 

2,752 
November   2,806 

2,808 

2,817 

2,852 
December   2,881 

2,907 

2,988 

3,057 


IQ20 

192/ 

2,998 

3,344 

2,914 

3,207 

2,849 

3,159 

2,844 

3,115 

2,850 

3,090 

2,891 

3,075 

2,959 

3,050 

2,977 

3,037 

3,019 

3,051 

3,030 

3,042 

3,039 

3,005 

3,047 

2,962 

3,048 

2,930 

3,077 

2,908 

3,080 

2,893 

3,073     . 

2,868 

3,068 

2,856 

3,074 

2,830 

3,092 

2,828 

3,083 

2,804 

3,085 

2,767 

3,107 

2,734 

3,127 

2,751 

3,112 

2,700 

3,104 

2,674 

3,116 

2,639 

3,168 

2,634 

3,180 

2,671 

3,135 

2,603 

3,118 

2,564 

3,120 

2,537 

3,141 

2,536 

3,169 

2,520 

3,174 

2,503 

3,203 

2,485 

3,243 

2,481 

3,295 

2,517 

3,289 

2,491 

3,279 

2,474 

3,304 

2,457 

3,322 

2,482 

3,353 

2,476 

3,356 

2,440 

3,351 

3,354 

3,328 



3,307 

3,325 

3,312 

3,311 

3,344 

3,404 

BAROMETERS  OF  FINANCE  203 

compares  with  the  low  record  of  42.2  per  cent  reached  on 
May  14,  1920.11 

Significance  of  changes  in  reserve  ratio. — A  change  in  the 
reserve  ratio  can  come  as  a  result  of  changes  in  one  or  more 
of  three  items,  namely,  cash  reserves,  loans  outstanding,  and 
notes  outstanding.  As  the  volume  of  loans  and  notes  depends 
upon  credit  conditions,  the  factors  arc  really  two  in  number: 
cash  reserves  and  outstanding  credit.  A  decline  in  the  re- 
serve ratio  signifies  either  a  decrease  in  cash  reserves,  or  an 
increase  in  credit  outstanding  at  the  member  banks;  an  in- 
crease in  the  ratio  may  mean  either  a  gain  in  cash  reserves, 
or  a  decline  in  outstanding  credit.  When  the  ratio  is  above 
60  per  cent,  a  decrease  is  a  favorable  sign;  when  the  ratio 
is  below  60  per  cent,  an  increase  is  more  desirable. 

The  gain  in  the  reserve  ratio  from  44.5  per  cent  on  June 
18,  1920,  to  56.8  per  cent  on  June  15,  1921,  was  due  chiefly 
to  a  contemporary  gain  in  cash  reserves  from  $2,1 00,900,000  to 
$2,615,624,000.  In  other  words,  the  improvement  in  the 
ratio  did  not  signify  a  corresponding  contraction  in  outstand- 
ing credits.12 

District  reserve  ratios. — A  recent  innovation  of  the  Fed- 
eral Reserve  Board  is  that  of  supplying  the  reserve  ratios 
for  the  separate  districts  as  is  shown  in  item  No.  32  of 
Table  No.  74.  Although  the  ratio  for  the  combined  banks 
was  56.8  per  cent,  the  individual  ratios  show  a  wide  variance 
from  38.5  per  cent  at  Dallas  to  68.8  per  cent  at  Boston. 
The  individual  ratios  are  invaluable  criteria  of  credit  con- 
ditions in  the  various  sections  of  the  country.  On  the  June 
15,  1921  showing,  the  agricultural  districts — notably  Dallas, 
Minneapolis,  Richmond,  and  Atlanta- — were  still  feeling  the 
effects   of   the   credit   difficulties   encountered   in   moving  the 

11  A  slightly  different  method  of  computing  the  ratio  was  employed  in  1920; 
under  the  present  method,  the  ratio  on  May  14,  1920,  would  have  been  40.5  per 
cent. 

u  A  different  method  of  computation  causes  confusion  in  comparing  the  reserve 
ratio  of  the  Bank  of  England  with  that  of  the  Federal  Reserve  banks.  The  Bank 
of  England  is  divided  into  two  departments,  one  of  banking  and  one  of  note 
issue ;  the  Federal  Reserve  banks  conduct  both  functions  without  the  depart- 
mental division.  In  London,  a  special  reserve  in  gold — of  approximately  100 
per  cent — is  set  up  against  bank  notes,  and  the  remainder  of  the  cash  applies 
against  the  deposit  liabilities.  On  June  15,  1921 — when  the  Federal  Reserve 
ratio  was  56.8  per  cent — the  reserve  of  the  Bank  of  England  was  reported  to  be 
13.14  per  cent.  Had  the  ratio  been  computed  according  to  the  American  plan  it 
would  have  been  53.6  per  cent. 


204 


BUSINESS  FORECASTING 


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BAROMETERS  OF  FINANCE  205 

1920  crops.  On  the  other  hand,  the  relatively  high  ratios 
in  the  industrial  centers — Boston,  Cleveland,  and  New  York 
— reflected  the  industrial  depression  which  was  then  present. 
The  district  reserve  ratios,  however,  are  subject  to  the  in- 
fluence of  interdistrict  borrowing  which  tends  to  help  one 
district  at  the  expense  of  another.  At  one  time  in  1920  the 
Dallas  ratio  was  really  under  30  per  cent,  but  through  the 
transfer  of  loans  to  other  Reserve  banks,  the  Dallas  ratio 
was  reported'  as  about  40  per  cent. 

Panics  and  the  Federal  Reserve  System. — Current  belief 
that  panics  as  a  recurring  feature  of  American  business  have 
been  eliminated  through  the  operations  of  the  Federal  Re- 
serve system  is  scarcely  founded  upon  fact.  Panics  are  psy- 
chological phenomena  and  no  country  can  ever  be  panic-proof 
until  the  minds  of  men  substantially  change.  Alternate 
stages  of  optimism  and  pessimism  cause  men  to  be  filled 
with  confidence  at  one  moment  and  with  apprehension  the 
next.  Neither  the  Federal  Reserve  system  nor  any  other 
bulwark  has  power  to  check  this  tendency. 

Ample  power  is  given  to  the  Federal  Reserve  banks  to 
prevent  a  financial  crisis  which  might  arise  from  a  shortage 
of  money,  as  happened  in  1907.  Federal  Reserve  notes 
can  be  issued  without  limit,  as  in  times  of  emergency,  the 
minimum  gold  reserve  requirement  may  be  suspended.  In 
this  manner,  the  fear  that  money  may  at  times  be  unobtain- 
able has  been  obviated — an  accomplishment  of  far-reaching 
importance. 

The  Federal  Reserve  banks  have  power  to  relieve  a  large 
share  of  the  mental  anxiety  that  has  often  accompanied  the 
period  of  transition  from  prosperity  to  depression.  Through 
control  over  credit  operations, — none  the  less  potent  because 
it  is  backed  by  the  power  of  persuasion  only — business  activity 
may  be  regulated  to  no  small  extent,  as  was  illustrated 
throughout  1920  when  bank  loans  were  arbitrarily  restricted 
according  to  the  purpose  for  which  the  borrower  desired 
the  funds.  Loans  for  speculative  purposes,  or  to  withhold 
commodities  from  the  market,  could  be  obtained  only  with 
extreme  difficulty. 

But  the  reserve  banks  have  not  the  power  to  prevent  the 
alternate  periods  of  prosperity  and  depression  which  will  con- 
tinue to  follow  each  other  while  the  present  organization  of 
commercial    society    exists.      The    operation    of    the    reserve 


206  BUSINESS  FORECASTING 

banks  will  mitigate  certain  of  the  effects,  but  the  general 
cyclical  trend  of  business  conditions  will  remain. 

Reporting  member  bank  statements. — As  has  been  pre- 
viously stated,  about  800  of  the  leading  member  banks  of 
the  Federal  Reserve  system — comprising  about  70  per  cent 
of  the  system  from  the  standpoint  of  resources — make  weekly 
reports  to  the  Federal  Reserve  Board.13    Although  the  state- 

TABLE  No.  79.— REPORTING  MEMBER  BANKS,  FEDERAL  RESERVE 
SYSTEM,  CONDITION,  JUNE  8,  1921* 

Number  of  reporting  banks 818 

Loans  and  discounts,  including  bills  rediscounted  with  Fed- 
eral Reserve  banks: 

Secured  by  United  States  Government  obligations $665,729 

Secured  by  stocks  and  bonds 3,017,433 

All  other 8,194,531 

Total  loans  and  discounts $11,877,693 

United  States  securities  owned 1,212,368 

Other  securities  owned 2,088,765 

Total  loans  and  investments,  including  rediscounts....  $15,178,826 

Reserve  balance  with  Federal  Reserve  banks 1,281,294 

Cash  in  vault 336,725 

Net  demand  deposits 10,212,589 

Time    deposits 2,931,310 

Government  deposits 25,526 

Discounts  with  Federal  Reserve  banks: 

Secured  by  United  States  Government  obligations 389,552 

All  other   2,311 

Rediscounts  with  Federal  Reserve  banks: 

Secured  by  United  States  Government  obligations 126,671 

All  other   839,583 

Ratio  of  discounts  and  rediscounts  at  Federal  Reserve  banks 

to  total  loans  and  investments 8.9% 

*  Compiled  from  "Official  Statement  No.  2059,"  Federal  Reserve  Board,  June 
16,  1921. 

ment  of  the  condition  of  the  reporting  member  banks  is 
issued  weekly  simultaneously  with  that  of  the  reserve  banks, 
the  period  covered  differs.  The  reserve  statement  shows 
the  condition  on  the  preceding  Wednesday;  the  member 
statement  shows  the  condition  on  the  second  preceding  Wed- 
nesday. As  the  reporting  member  banks  comprise  all  im- 
portant banks  in  the  country,  the  weekly  statement  permits 

"Their  resources  are  estimated  to  be  between  65  and  70  per  cent  of  the  re- 
sources of  all  member  banks  and  between  35  and  40  per  cent  of  all  commercial 
banks  in  the  country. — W.  P.  G.  Harding,  Governor,  Federal  Reserve  Board,  in 
address  before  Chamber  of  Commerce,  Cleveland,  Ohio,  September  16,  1920. 


BAROMETERS  OF  FINANCE  207 

a  closer  analysis  to  be  made  of  the  condition  of  the  indi- 
vidual banks  than  is  provided  by  the  reserve  bank  statement. 
It  is  a  distinct  improvement  in  this  respect  over  the  former 
method  of  securing  this  information  bi-monthly,  and  even 
then  one  to  two  months  late,  from  the  Comptroller's  call 
for  national  bank  reports. 

National  bank  statements. — As  is  indicated  in  the  preced- 
ing paragraphs,  the  bi-monthly  reports  on  the  condition  of 
the  national  banks  no  longer  hold  the  same  interest  as  ob- 
tained before  the  weekly  Federal  Reserve  statements.  Prac- 
tically the  same  information  is  now  obtainable  weekly.  Six 
times  each  year  the  national  banks  are  required  to  report  to 
the  Comptroller  of  the  Currency.  The  individual  reports 
are  combined,  and  the  totals  made  public.  The  two  significant 
items  are  (1)  the  total  loans  and  discounts  and  (2)  the 
total  individual  deposits.  Table  No.  80  shows  the  amount 
in  each  of  these  items  in  the  various  calls  from  1912  to  1920. 
It  is  significant  to  note  that  loans  and  discounts  did  not  reach 
their  maximum  until  the  early  fall  of  1920  despite  the  fact 
that  prices  started  to  fall  in  early  spring  and  industrial  conditions 
were  already  becoming  unfavorable.  "Frozen"  credit  caused  by 
railroad  traffic  congestions  in  the  summer  and  the  withhold- 
ing policy  of  the  agriculturists  in  the  fall  caused  the  volume 
of  outstanding  credit  to  remain  undiminished  until  the  very 
end  of  the  year. 

Bank  statements  as  business  barometers. — Bank  state- 
ments are  of  great  importance  in  business  barometric  work. 
Their  chief  significance  is  as  a  criterion  of  existing  conditions 
of  credit.  Practically  every  business  transaction  in  the 
country  has  some  element  of  credit  involved.  When  a  firm 
sells  on  credit,  the  firm  ordinarily  passes  on  to  its  customer 
the  credit  it  received  at  its  bank.  If  bank  credit  must  be 
curtailed  at  any  time,  then  business  credits  must  also  be  re- 
duced. And  as  adequate  credits  are  a  prime  necessity  in 
business,  any  reduction  in  credit  availability  adversely  affects 
commerce. 

In  a  period  of  business  activity  the  demand  for  credit  in- 
creases. This  is  reflected  almost  immediately  in  the  loans 
of  the  banks,  in  the  discounts  at  the  reserve  banks,  in  the 
gain  in  Federal  Reserve  notes  in  circulation,  and  most  likely, 
in  a  decrease  in  the  reserve  ratio  for  the  combined  reserve 
banks.     As  business  activity  grows,  the  demand  for  credit  in- 


208                   BUSINESS  FORECASTING 

TABLE  No.  80.— CONDITION  OF  THE  NATIONAL  BANKS  OF  THE 
UNITED  STATES  AT  COMPTROLLER'S  BI-MONTHLY  CALLS, 

1912-1920* 

Date  of  call  Loans  and  discounts  Individual  deposits 

1920 

December  29 $12,095,295,000  $13,137,012,000 

November  15    12,311,514,000  13,719,996,000 

September  8    12,415,762,000  13,595,934,000 

June  30    12,396,900,000  13,705,325,000 

May  4    12,288,582,000  13,533,908,000 

February  28   11,994,523,000  13,303,367,000 

1919 

December  31    11,786,227,000  13,464,704,000 

November  17    11,560,242,000  13,314,015,000 

September  12 11,085,462,000  12,672,567,000 

June  30    10,574,838,000  11,891,132,000 

May  12 9,904,821,000  11,832,779,000 

March  4    9,691,187,000  11,211,050,000 

1918 

December  31    9,918,294,000  11,934,445,000 

November  1    10,096,940,000  10,913,330,000 

August  31    9,493,666,000  10,493,140.000 

June  29 9,620,402,000  10,181,739,000 

May  10    9,260,041,000  10,439,433,000 

March  4    9,139,225,000  10,454,825,000 

1917 

December  31  9,800,836,000  10,734,677,000 

November  20    9,535,527,000  10,338,813,000 

September  11    9,055,248,000  9,975,352,000 

June  20    8,818,312,000  9,521,648,000    ' 

May  1 8,751,679,000  9,696,459,000 

March  5 8,712,862,000  6,273,760,000 

1916 

December  27 8,340,626,000  9,003,042,000 

November  17 8,345,784,000  9,139,134,000 

September  12    7,859,837,000  8,445,649,000 

June  30    7,679,167,000  8,143,048,000 

May  1 7,606,428,000  8,136,018,000 

March  7 7,490,011,000  7,716,379,000 

1915 

December  31 7,357,732,000  7,641,259,000 

November  10 7,233,929,000  7,446,175,237 

September  2    6,756,680,004  6,762,182,713 

June  23    6,659,971,463  6,611,281,821 

May  1 6,643,887,951  6,661,581,353 

March  4 6,499,964,605  6,348,890,100 

1914 

December  31   6,347,636,510  6,346,362,249 

September  12    6,400,767,386  6,139,081,279 

June  30    6,430,069,214  6,268,692,429 

March  4 6,357,535,898  6,111,328,457 

January  13    6,175,404,961  6,072,064,752 

•From  New  York  Evening  Post,  December  31,  1920,  p.  4F. 


BAROMETERS  OF  FINANCE  209 

TABLE   No.   80.— CONDITION   OF  THE   NATIONAL  BANKS   OF  THE 
UNITED  STATES  AT  COMPTROLLER'S  BI-MONTHLY  CALLS, 

1912-1920* 

Date  of  call  Loans  and  discounts  Individual  deposits 

1913 

October  21  6,260,877,853  6,051,689,087 

August  9   6,168,555,525  5,761,338,731 

June  4    6,143,028,132  5,953,461,551 

April  4 6,178,096,379  5,968,787,045 

February  4    6,125,029,165  5,985,432,295 

1912 

November  6    6,058,982,029  5,944,561,069 

September  4    6,040,841,270  5,891,670,007 

June  14 5,953,904,431  5,825,461,163 

April  18     5,882,166,597  5,712,051,088 

February  20    5,810,433,940  5,630,559,231 

*  From  New  York  Evening  Post,  December  31,  1920,  p.  4F. 

creases  even  more  rapidly  because  not  only  of  a  greater 
number  of  transactions  but  because  of  increasing  prices  per 
unit. 

Experience  has  taught  that  in  periods  such  as  this,  a  large 
volume  of  credit  is  unwisely  extended  and  an  era  of  specula- 
tion and  inflation  results.  This  is  reflected  in  the  bank  state- 
ments which  show  a  low  proportion  of  reserve  to  loans,  and 
large  increases  in  loans  and  currency  outstanding.  The 
banks,  however,  have  not  unlimited  lending  power  and  as 
they  begin  to  approach  the  limit  of  their  loan  expansion,  a 
policy  of  credit  curtailment  is  necessary.  At  this  time  in 
the  business  cycle,  previous  to  the  Federal  Reserve  system, 
panic  developed.  Credit  curtailment  came  with  disastrous 
rapidity.  Even  with  the  reserve  banks,  curtailment  became 
necessary  early  in  1920,  as  a  reserve  ratio  of  42.2  per  cent 
indicated. 

Increased  activity  in  business  is  possible  only  when  credit 
conditions  permit.  Times  of  prosperity  come  to  a  rapid  term- 
ination when  credit  is  no  longer  freely  obtainable;  and  the 
ease  with  which  credit  is  obtainable  after  a  period  of  depres- 
sion facilitates  greatly  the  ensuing  recovery. 

INTEREST    RATES 

The  difference  in  interest  rates.  —  Interest  rates  vary 
widely  according  to  time,  location,  and  the  nature  of  the 
loan.  For  barometric  purposes,  three  are  of  major  impor- 
tance :      ( 1 )     the    discount    rate    on    ninety-day    commercial 


210  BUSINESS  FORECASTING 

paper  at  the  Federal  Reserve  Bank  of  New  York;  (2)  the 
market  rate  of  interest  on  prime  double-name  commercial 
paper  in  New  York  City;  and  (3)  the  interest  rate  on  call 
loans  on  the  New  York  Stock  Exchange.  Each  of  these 
rates  is  of  particular  significance. 

The  current  rate  of  interest  is  always  determined  by  the 
supply  of  loanable  funds,  i.e.,  by  the  existing  credit  avail- 
ability. If  the  supply  exceeds  the  demand  at  the  current 
rate,  the  rate  will  fall;  and  if  the  demand  exceeds,  the  rate 
will  advance.  It  is  fairly  obvious  that  the  trend  of  interest 
will  be  upward  in  a  period  of  activity  and  downward  in  the 
succeeding  period  of  inactivity.  But  more  specific  inquiry  is 
necessary. 

The  Federal  Reserve  discount  rate. — Although  it  has  yet 
to  assume  its  rightful  position,  the  discount  rate  set  at  the 
reserve  banks  and  charged  by  the  reserve  banks  to  member 
banks  who  desire  to  rediscount  loans,  will  eventually  control 
all  interest  rates  in  this  country  in  the  same  manner  that  the 
discount  rate  at  the  Bank  of  England  dominates  interest  rates 
in  Great  Britain.  In  London,  the  discount  rate  is  kept  above 
the  market  rate  of  interest;  any  change  in  the  discount  rate 
is  promptly  followed  by  a  corresponding  change  in  the  market 
rate.  Because  of  war  exigencies  which  existed  from  the  be- 
ginning of  the  reserve  system,  a  similar  policy  has  been  im- 
possible in  this  country  up  to  the  present  time. 

The  discount  rate  at  the  reserve  banks  was  a  factor  of 
no  small  importance  in  causing  the  change  in  the  trend  of 
business  conditions  in  1920.  The  mere  announcement  that 
an  increase  in  the  discount  rate — which  was  then  under  5  per 
cent — was  imminent,  caused  a  small  panic  on  the  stock  ex- 
changes in  the  late  fall  of  1919.  The  subsequent  increase 
in  the  rate  on  commercial  loans  at  New  York  to  6  per  cent 
in  January,  1920,  and  to  7  per  cent  in  June,  1920,  coupled 
with  an  arbitrary  restriction  against  loans  for  non-essential 
purposes,  abruptly — too  much  so  it  proved — checked  credit 
expansion.14  The  discount  rate  remained  7  per  cent  until 
May  4,  1921,  when  it  was  reduced  to  6y2  per  cent.  On  June 
15,    1921,   it  was   further  reduced   to  6   per  cent.      The  re- 

"I  believe  firmly  that  the  Board  by  its  powers  to  regulate  and  increase  or 
reduce  the  supplies  of  funds  and  the  interest  charges  for  money  could  have 
saved  us  from  a  fall  so  precipitate  and  smashing. — Ex-Comptroller  J.  S.  Wil- 
liams in  The  Commercial  and  Financial  Chronicle,  vol.  112,  No.  2914,  p.  1814. 
Mr.  Williams  was  a  member  of  the  Board  at  the  time. in  point. 


BAROMETERS  OF  FINANCE 


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212  BUSINESS  FORECASTING 

ductions  in  1921  indicated  that  money  conditions  were  much 
easier,  but  even  6  per  cent  is  much  too  high  for  a  basic  rate. 
As  is  shown  in  Table  No.  81,  the  pre-war  discount  rate  at 
the  Bank  of  England  averaged  less  than  5  per  cent. 

The  market  rate  of  interest. — To  the  business  man,  the 
Federal  Reserve  discount  rate  has  been  of  academic  interest  ' 
only.      It   applies   only  to  transactions  between   the   member 
banks  and  the  reserve  banks.     And  until  such  time  as  the 

TABLE  No.  82.— INTEREST  RATES  ON  60-90  DAY  CHOICE  DOUBLE- 
NAME  COMMERCIAL  PAPER,  1911-1920* 

(Average  monthly  rates  in  New  York  City.) 

flndices  1920    1919    1918    1917    1916    1915    1914    1913    1912    1911 

January  98.9  6.0  5.2  5.6  3.6  3.1  3.8  4.5  4.9  3.9  4.0 

February  92.6  6.4  5.2  5.7  4.1  3.1  3.8  3.8  4.9  3.8  4.1 

March    96.4  6.7  5.4  5.9  4.1  3.1  3.4  3.9  5.8  4.2  3.9 

April    94.8  6.8  5.4  5.9  4.3  3.1  3.7  3.7  5.5  4.2  3.7 

May   91.8  7.2  5.4  5.9  4.8  3.1  3.7  3.9  5.4  4.2  3.6 

June     89.2  7.7  5.5  5.9  5.0  3.6  3.7  3.8  5.9  4.0  3.7 

July    94.0  7.8  5.4  5.9  4.7  4.0  3.3  4.4  6.1  4.5  3.8 

August    101.7  8.0  5.4  5.9  4.8  3.7  3.5  6.3  6.0  5.0  4.2 

September   ....109.2  8.0  5.4  6.0  5.2  3.4  3.3  6.7  5.8  5.6  4.5 

October    110.5  8.0  5.4  6.0  5.4  3.4  3.2  6.4  5.7  5.9  4.4 

November   ....109.9  7.9  5.5  6.0  5.5  3.5  3.0  5.5  5.6  5.7  3.9 

December   ....111.0  7.88  5.9  5.9  5.5  3.9  3.1  4.4  5.7  6.0  4.6 

*  From  Standard  Daily  Trade  Service,  May  18,  1921,  p.  175. 
t  Of  seasonal  variation  determined  by  the  median  of  ratios  of  monthly  value 
to  twelve  months  moving  average  centered  for  the  years  1901-1913,  inclusive. 

discount  rate  influences  the  market  rate,  rather  than  vice 
versa,  as  has  thus  far  been  the  case,  the  discount  rate  will 
remain  of  secondary  interest. 

The  market  rate  of  interest  plays  an  important  part  in 
commerce.  A  substantial  volume  of  business  is  impossible 
without  the  use  of  credit.  If  the  charge  for  credit  exceeds 
the  expected  profit,  the  money  will  not  be  borrowed,  nor  in- 
cidentally will  the  business  be  consummated.  Low  interest  rates 
encourage  business  activity,  and  high  interest  rates  act  as  a 
deterrent.  As  is  shown  in  Table  No.  82,  the  low  interest 
rates  which  prevailed  throughout  1915  were  as  great  a 
stimulus  to  business  as  the  high  rates  in  effect  in  1920  were 
a  handicap. 

Call  money  rates. — The  interest  rate  on  call  loans  reflects 
from  day  to  day  the  amount  of  surplus  funds  available  in  the 


BAROMETERS  OF  FINANCE 


213 


CHART  XXXIV.— COMMERCIAL  PAPER  INTEREST  RATES:  1831-1920* 


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High,  Low,  and  Average  Interest  Rates  on  Commercial  Paper  Each  Year  from  1831  to  1920 


*  From  Bulletin  of  Federal  Reserve  Bank  of  New  York. 


214 


BUSINESS  FORECASTING 


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BAROMETERS  OF  FINANCE  215 

banks.15  The  rate  is  subject  to  change  each  day,  and  the 
renewal  rate  for  the  new  day  is  not  necessarily  the  same  as 
for  the  day  before.  At  times,  the  renewal  rate  has  been 
many  per  cent  higher,  and  at  other  times  lower  than  the  rate 
for  the  preceding  day.  As  is  shown  in  Table  No.  83,  the 
call  loan  rate  fluctuates  widely.  It  has  been  as  low  as  1  per 
cent  (March,  1911)  and  as  high  as  25  per  cent  (January, 
1920). 

The  call  loan  rate  is  of  chief  significance  to  traders  on  the 
speculative  markets  who  are  accustomed  to  operate  on  a 
margin  seldom  exceeding  10  per  cent.  The  call  rate,  how- 
ever, is  of  significance  to  the  entire  business  world  as  the 
trend  of  interest  rates  expresses  itself  first  at  this  point. 

Interest  rates  as  a  barometer  of  business. — Interest  rates 
are  closely  allied  to  bank  statements  as  barometers  of  busi- 
ness inasmuch  as  both  are  indicia  of  the  condition  of  the 
money  market.  Bank  statements  are  the  more  valuable  of 
the  two,  however,  as  changes  in  interest  rates  may  always  be 
foreseen  from  the  relative  condition  of  the  banks. 

An  increasing  market  rate  of  interest  indicates  a  period  of 
business  activity.  When  the  rate  reaches  and  exceeds  6  per 
cent,  the  end  of  the  extreme  activity  is  not  far  distant,  as 
experience  has  shown  that  the  average  business  house  cannot 
profitably  borrow  at  rates  above  6  per  cent  for  any  prolonged 
period.  Decreasing  interest  rates  indicate  dullness  in  com- 
merce, and  very  low  rates  signify  recovery  in  the  near  future. 

GOLD    MOVEMENTS 

The  normal  flow  of  gold. — Gold,  as  the  only  international 
money,  is  transferred  from  one  nation  to  another  in  normal 
times  in  payment  of  adverse  trade  balances.  The  value  of 
the  total  debits,  including  "visible"  items  such  as  merchandise 
shipments  and  "invisible"  items  such  as  interest  payments, 
of  one  nation  against  another  is  compared  with  the  value  of 
the  total  credits,  comprising  similar  items,  and  the  balance 
is  said  to  be  favorable  to  the  country  which  has  an  excess 
of  credits  and  unfavorable  to  the  nation  which  has  an  excess 
of  debits.  The  balance  is  then  adjusted  through  a  gold  ship- 
ment from  the  latter  to  the  former. 

"A  call  loan  is  one  payable  on  demand  for  $5,000  or  more,  secured  by  negoti- 
able collateral.    Its  use  is  practically  confined  to  the  stock  exchanges. 


216  BUSINESS  FORECASTING 

TABLE  No.  84.— BALANCE  OF  GOLD  MOVEMENTS  TO  AND  FROM  THE 
UNITED  STATES,  1890-1920* 

Year  ended  Excess  of 

June  jo  Exports  over  imports    Imports  over  exports 

1890 $4,331,149  

1891 68,130,087  

1892 495,873  

1893 87,506,463  

1894 4,528,942  

1895 30,083,721  

1896 78,884,882  

1897 $44,653,200 

1898 104,985,283 

1899 51,432,517 

1900 3,693,575  

1901 12,866,010 

1902 3,452,304 

1903 2,108,568  

1904 17,595,382 

1905 38,945,063  

1906 57,648,139 

1907 63,111,073 

1908 75,904,397 

1909 47,527,829  

1910 75,223,310  

1911 51,097,360 

1912 8,391,848  

1913 8,568,597  

1914 45,499,870  

1915 25,344,607 

1916 403,759,753 

1917 685,254,801 

1918 66,438,741  

Dec.  31 

1918  (6  mos.) 7,648,323  

1919 291,651,202  

1920 106,612,298 

*  "Statistical  Abstract  of  the  United  States,"  1919,  p.  522. 

Prior  to  the  outbreak  of  the  World  War  in  1914,  no  regu- 
larity existed  in  the  movement  of  gold  in  and  out  of  the  United 
States  as  is  shown  in  Table  No.  84.  The  aggregate  exports 
and  imports  during  the  period  from  1890  to  1914  show  no 
large  difference.  Nor  does  the  table  show  any  tendency  for 
gQid  exports  to  increase  during  years  of  prosperity — a  result 
which  normally  might  be  expected  by  reason  of  relative  high 


BAROMETERS  OF  FINANCE  217 

prices  for  domestic  goods  at  such  times.  The  crisis  which  has 
often  followed  such  periods  of  prosperity  cannot  therefore  be 
attributed  to  credit  contraction  caused  by  loss  of  gold  abroad. 

Gold  movements  since  1914. — As  a  result  of  the  World 
War,  the  international  movement  of  gold  has  had  a  profound 
effect  upon  business  conditions  in  the  United  States.  In  the 
period  which  began  on  August  1,  1914,  and  ended  on  May 
10,  1921,  this  country  gained  as  a  result  of  the  excess  of  gold 
imports  over  exports  the  sum  of  $  1,1 41, 964,000. 16  When 
it  is  remembered,  as  has  been  explained,  that  under  present 
banking  laws,  a  dollar  in  gold  serves  as  the  basis  for  nearly 
$30  in  credit,  the  potential  expansion  in  the  American  credit 
structure  of  this  enormous  increase  becomes  immediately  ap- 
parent. Herein  is  found  the  principal  reason  for  the  credit 
inflation  which  developed  during  the  war. 


TABLE  No.  85.— NATIONS  HOLDING  LARGEST  GOLD  STOCKS  IN  1$>19* 

(at  end  of  year) 
Rank  Nation  Amount 

1 United  States   $2,708,862,000t 

2 Great  Britain   777,872,000 

3 France    694,839,000 

4 Japan    527,801,000 

5 Spain     466,800,000 

6 Argentina    299,119,000 

7 Germany    259,519,000 

8 Netherlands    256,204,000 

9 Russia    232,107,000 

10 Australia    221,519,000 

11 Denmark    187,380,000 

12 Italy    171,276,000 

13 British  India 114,266,000 

14 Switzerland   87,451,000 

15 Sweden  75,350,000 

*  "Report  of  the  Comptroller  of  the  Currency,"  1920,  p.  24. 

tOn  June  1,  1921,  the  gold  stock  in  the  United  States  was  $3,175,000,000. 

The  situation  in  the  United  States  in  1921. — As  this 
chapter  is  being  written,  gold  is  flowing  into  the  United 
States  in  vast  quantities.  Between  January  1  and  May  10, 
the  gain  has  exceeded  $260,000,000.  Of  course,  it  can  not 
long  continue  at  this  rate,  even  were  the  inward  flow  entirely 

'""Federal  Reserve  Bulletin,"  vol.  7,  No.  6,  p.  186. 


218 


BUSINESS  FORECASTING 


% 


c,i                 ro                 t->                                 T-1                 co 
o              o              o                              o              o 
p                o                o                o                o                o 

PROSPERITY 

1891 

1892 

MAJOR  CRISIS 

1893 

1894 

\     DEPRESS IOH 

1895 

1896 

RECOVERY 

1897 

1898 

| 

1899 

CD 

fed 
_    o 

PROSPERITY 

1900 

o 

•  1901 

1902 

1903 

1-3 
CO 

1904 

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1906 

O 

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MAJOR  CRISIS 

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1 

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1908 

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P 

RECOVjSRY 

1909 

b 

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PROSPERITY 

1910 

8 

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1911 

CD 

1912 

o 
1 

t-1 

1913 

ro 
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1914 

1915 

1916 

1917 

1918 

1919 

= 

MAJOR  CRISIS 

1920 

BAROMETERS  OF  FINANCE  219 

desirable.  The  total  gold  money  stock  of  the  world  is  less 
than  $8,000,000,000  of  which  this  country  possesses  about 
40  per  cent.  No  other  individual  nation  even  approaches 
the  United  States  in  the  volume  of  gold  holdings,  as  is  shown 
in  Table  No.  85. 

Gold  entering  the  United  States  serves  one  of  two  pur- 
poses: either  it  may  be  used  as  a  basis  for  credit  granting, 
or  it  may  be  utilized  to  strengthen  the  reserves  against  the 
credit  already  outstanding.17  Which  will  prove  the  case 
depends  entirely  upon  the  policy  adopted  by  the  Federal 
Reserve  Board.  Thus  far,  the  credit  restrictions  imposed 
in  1920  are  being  lifted  most  gradually.  Accordingly  the 
gold  which  has  been  received  during  the  past  year  has  served 
the  second  function,  that  of  strengthening  cash  reserves.  The 
gain  in  the  reserve  ratio  from  42.2  per  cent  on  May  14, 
1920,  to  56.8  per  cent  on  June  15,  1921,  is  attributable 
chiefly  to  this  policy  on  the  part  of  the  reserve  banks. 

New  gold  production. — To  a  nation  which  has  received 
about  three-quarters  of  the  total  gold  production  of  the 
world  during  the  preceding  year  in  the  first  four  months 
of  1921,  the  quantity  of  current  production  creates  little  in- 
terest. Yet  it  should  be  remembered  that  the  gold  which  is 
being  received  in  this  country  is  the  new  gold  which  is  being 
produced  in  the  most  part.  In  other  words,  the  gain  in  the 
gold  holdings  of  the  United  States  has  not  been  at  the  ex- 
pense of  the  gold  stocks  of  the  other  nations  of  the  world. 
The  new  gold  production  of  the  Transvaal — the  most  pro- 
ductive gold  mines  in  the  world — is  sold  at  auction  in  London 
and  the  United  States  has  been  able  to  secure  most  of  it  by 
reason  of  the  premium  on  the  dollar  in  that  market.  Appar- 
ently the  gold  influx  into  the  United  States  will  continue  until 
such  time  as  it  is  stopped  by  this  country. 

Production  of  new  gold  declined  materially  during  the 
war.  Inasmuch  as  gold  has  no  price  but  is  price,  gold  pro- 
ducers were  confronted  with  the  greatly  increased  operating 
expenses  and  a  stationary  revenue.  The  total  production 
which  amounted  to  $455,239,000  in  1910  was  curtailed  to 
$339,400,000  in  1920.18     The  decrease  in  gold  production  is 

"Under  an  arrangement  made  by  the  Treasury  Department,  all  gold  imports 
are  delivered  to  the  Federal  Reserve  banks. 

18  The  Journal  of  Commerce   (N.  Y.)(  February  7,  1921. 


220 


BUSINESS  FORECASTING 


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BAROMETERS  OF  FINANCE  221 

unfortunate  as  it  makes  even  more  difficult  the   restoration 
of  the  depreciated  currencies  of  Europe. 

Gold  movements  as  a  business  barometer. — Gold  move- 
ments have  lost  most  of  their  former  significance  as  a  barom- 
eter of  business.  Exports  embargoes  on  gold  shipments, 
except  by  special  arrangement,  in  most  of  the  leading  nations 
prevent  the  normal  flow  of  gold  in  payment  of  merchandise 
obligations.  From  the  standpoint  of  the  United  States,  the 
chief  significance  is  the  effect  of  the  gold  imports  and  exports 
upon  the  credit  situation.  As  long  as  the  present  policy  of 
the  reserve  banks  obtains — that  of  using  imports  to  strengthen 
reserves,  a  repetition  of  the  war  inflation  of  credit  is  impossible. 

FISCAL  OPERATIONS   OF  THE   TREASURY   DEPARTMENT 

The  relation  of  Government  to  business. — During  the 
World  War,  the  public  debt  of  the  United  States  increased 
from  less  than  one  billion  to  over  twenty-five  billion  dollars. 
The  annual  expenditures  of  the  Government  have  increased 
from  about  one  billion  to  five  billion.  One  item  alone,  the 
interest  on  the  public  debt,  now  exceeds  the  entire  expense 
of  conducting  the  Government  before  the  war. 

Federal  taxes  before  the  war  were  extremely  light;  in  fact 
negligible  in  comparison  with  the  present.  As  the  problem 
of  the  redemption  of  the  public  debt  is  one  of  taxes  and  as 
taxes  have  become  of  lively  interest  in  business  circles  and 
exert  a  definite  effect  upon  conditions,  the  problem  deserves 
careful  consideration  from  a  barometric  standpoint. 

Table  No.  87  shows  the  public  debt  of  the  United  States 
as  of  June  1,  1921,  arranged  according  to  the  maturity  dates 
of  the  various  items.  By  June  30,  1922,  a  total  of  over 
$2,000,000,000  must  be  met;  during  the  following  year  an 
additional  four  billions;  and  within  the  following  five  years,  a 
further  amount  of  six  billions;  or,  a  total  of  $12,000,000,000 
within  the  next  seven  years  in  addition  to  the  regular  expenses 
of  conducting  the  Government. 

The  possibility  of  tax  reduction. — In  contrast  to  the  fore- 
going is  shown  Table  No.  88  which  gives  the  results  of  the 
operations  of  the  Treasury  Department  for  the  fiscal  period 
from  July  1,  1920,  to  June  15,  1921 — almost  a  full  fiscal 
year.  This  table  appears  daily  in  many  of  the  leading  news- 
papers and  is  worthy  of  careful  study  as  it  shows  to  what 
extent  the  Government  is  "catching  up  with  the  game."     For 


222  BUSINESS  FORECASTING 

TABLE  No.  87.— PUBLIC  DEBT  OF  THE  UNITED  STATES  ON 

JUNE  1,  1921* 

(Arranged  according  to  maturity) 

Treasury  Certificates  1922*  $2,831,948,450 

Victory  Liberty  Loan 1923a  4,022,1 16,555 

War  Savings  Securities 1924'  704,382,584 

Loan  of  1925 1925  118,489,900 

Third  Liberty  Loan 1928  3,643,848,200 

Consols  of  1930 1930  599,724,050 

Panama's  of  1936 1936  48,954,180 

Panama's    of    1938 1938  25,947,400 

Fourth  Liberty  Loan 1938*  6,357,692,050 

Second  Liberty  Loan 1942s  3,317,847,700 

First  Liberty  Loan 1947"  1,952,279,350 

Panama's    of    1961 1961  50,000,000 

Non-interest-bearing  debt *  230,260,212 

Miscellaneous   *  49,250,960 

Total  gross  debt $23,952,741,592 

Balance  in  Treasury 244,565,951 

Net  debt $23,708,175,641 

'Treasury  certificates  have  varying  maturities  from  1  to  3  years  but  the  great 
majority  are  for  12  months  or  less. 
'Optional  redemption  in  1922. 

'Maturity  is  5  years  from  issue;   most  were  issued  in  1918  and  1919. 
'Optional  redemption  in  1933. 
'Optional  redemption  in  1927. 
'Optional  redemption  in  1932. 

7  Chiefly  United  States  currency  notes. 

8  Postal  Savings  and  Conversion  bonds  having  varying  maturities. 

•Compiled  from  The  Commercial  and  Financial  Chronicle,  vol.  112,  No.  2920, 
p.  2502. 

the  period  in  question,  the  excess  of  ordinary  receipts  over 
expenditures — it  is  the  amount  of  just  this  surplus  that  deter- 
mines the  rapidity  with  which  the  public  debt  can  be  reduced — 
amounted  to  $241,320,000.  In  comparison  with  the  same 
period  for  the  preceding  year — which  showed  a  deficit  of 
$488,452,000,  the  showing  seems  fairly  good,  but  it  is  far 
from  being  so. 

Tax  rates  are  so  high  that  they  are  a  cause  for  continual 
complaint  in  business  quarters  that  they  act  as  a  positive  de- 
terrent. Yet  the  revenues  of  the  Government  are  barely 
sufficient  to  meet  the  expenses  to  say  nothing  of  meeting 
enormous  maturities  of  the  public  debt  in  the  next  few  years. 
It  is  inconceivable  that  tax  rates  can  be  reduced,  at  least 
for  many  years.  Yet  radical  reductions  in  the  appropriations 
for  armament,  as  well  as  elsewhere  in  Government  expendi- 


BAROMETERS  OF  FINANCE 


223 


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224  BUSINESS  FORECASTING 

tures  can  work  wonders  in  this  direction.  The  small  daily 
statement  of  the  Treasury  Department  gives  a  far  better  in- 
dication of  what  is  being  accomplished  along  these  lines  than 
columns  of  reading  matter. 

Fiscal  operations  of  the  Treasury  as  a  barometer  of 
business. — The  chief  barometric  significance  in  the  daily  re- 
ports of  Treasury  operations  relates  to  taxation.  Heavy 
tax  rates  which  presently  exist  can  be  reduced  only  when  the 
Treasury  Department  is  able  to  build  up  a  substantial  surplus 
in  revenues  over  expenditures.  Incidentally,  the  outlook  for 
lower  taxes  before  1950  is  not  favorable,  and  before  1930 
practically  impossible. 


Chapter  XII 

BAROMETRIC  SUMMARY 

Business  barometers  in  general. — In  applied  meteorology 
a  barometer  does  not  derive  its  chief  utility  from  the  accuracy 
with  which  it  measures  existing  weather  conditions.  A  ther- 
mometer also  measures  weather  conditions,  and  with  equal 
accuracy.  A  barometer,  .however,  measures  air  pressure, 
whereas  a  thermometer  indicates  the  degree  of  heat.1  Changes 
in  atmospheric  pressure — attributable  though  they  are  to  rela- 
tive differences  in  the  degree  of  heat  in  neighboring  regions 
— have  a  greater  significance  from  the  standpoint  of  prede- 
termining future  weather  conditions  than  do  temperature 
changes.  It  is  this  function  of  a  barometer — as  a  prognosti- 
cating agent — that  makes  it  of  greater  utility  than  certain  other 
meteorological  instruments  that  do  not  contain  this  function. 

A  technical  error  is  therefore  made  in  the  assumption  that 
all  the  various  ways  in  which  business  activity  is  measured  are 
true  commercial  barometers.  Agricultural  production  deserves 
to  be  called  barometer  because  subsequent  economic  develop- 
ments are  largely  predicated  upon  this  factor.  But  bank 
clearings  are  more  analogous  to  the  thermometer  than  to  the 
barometer  since  they  serve  almost  solely  to  measure  current  ac- 
tivity and  give  no  basis  for  determining  future  activity. 

In  the  chapters  immediately  preceding,  each  of  the  various 
methods  which  are  commonly  used  for  commercial  barometric 
purposes  have  been  separately  discussed  and  it  has  been  shown 
that  all  are  not  of  equal  importance.  The  purpose  of  the  pres- 
ent chapter  is  to  epitomize  the  thought  of  the  foregoing  chap- 
ters, and  to  show  the  interrelationship  of  the  functions  of 
business  from  a  forecasting  viewpoint. 

Interrelationship  of  business  forces. — Business  forecasting 
may  be  likened  to  estimating  the  outcome  of  a  push-ball  con- 
test.   If  the  ball  is  subject  to  the  pushing  power  of  an  individ- 

1  "Barometer:    An  instrument  for  determining  the  weight  or  pressure  of  the 

atmosphere,    and   hence   for   judging   of   the   probable   changes   of   weather." 

"Webster's  New  International  Dictionary." 

225 


226  BUSINESS  FORECASTING 

ual,  the  direction  in  which  the  ball  will  move  and  the  rapidity 
attained  can  be  determined  by  measuring  the  strength  of  the 
individual  and  noting  the  direction  in  which  the  power  is  ap- 
plied. If  two  persons  are  endeavoring  to  move  the  ball,  each 
in  a  different  direction,  the  future  movement  of  the  ball  can 
be  determined  by  measuring  the  relative  strength  of  the  two 
individuals.  If  three  or  more  persons  endeavor  to  move  the 
ball  simultaneously,  the  problem  of  predetermining  the  move- 
ment of  the  ball  can  be  solved  througlh  the  same  mathematical 
process  of  measuring  the  opposing  forces. 

The  trend  of  business  conditions  may  be  assumed  to  be  the 
push-ball,  and  all  the  various  factors  which  influence  business 
conditions  to  be  the  players  in  the  contest.  The  problem  is 
unchanged;  the  method  of  attack  similar.  If  it  were  possible 
accurately  to  measure  the  various  forces  which  influence  busi- 
ness conditions,  it  would  be  likewise  possible  to  foretell  cor- 
rectly changes  in  the  conditions.  From  a  practical  standpoint, 
the  great  difficulty  lies  in  the  proper  measurement  of  the  in- 
fluencing  factors.2 

Few,  if  any,  economic  developments  are  without  effect,  large 
or  small,  upon  all  forms  of  commercial  activity.  A  slight 
change  in  the  railroad  freight  rate  on  raw  cotton  shipments 
between  two  neighboring  towns  in  Texas  has  been  known  to 
affect  the  price  of  raw  cotton  in  Liverpool.3  Because  the  term 
implies  the  mental  capacity  correctly  to  ascertain  and  properly 
to  weigh  the  innumerable  forces  which  are  constantly  affecting 
business  conditions,  accurate  commercial  forecasting  must  al- 
ways remain  a  relative  concept.  An  intellect  with  the  power 
to  secure  a  comprehensive  grasp  on  all  the  permutations  of 
commerce  is  found  as  rarely  as  a  Galileo,  a  Newton,  or  an 

3  The  complexity  of  the  problem  may  be  better  understood  if,  in  considering 
the  push-ball  problem,  it  is  assumed  that  in  a  large  hall  some  thirty  men  have 
various  positions  along  the  walls  to  which  each  will  endeavor  to  push  the  ball. 
The  men  have  different  degrees  of  strength  and  aggressiveness  and  are  per- 
mitted to  use  any  tactics  and  may  push  each  other  as  well  as  the  ball.  Where 
will  the  ball  be  at  the  end  of  two  or  three  minutes? 

3  One  of  the  most  perplexing  problems  in  astronomy — that  of  bringing  into 
line  with  modern  theory  a  whole  series  of  eclipses  of  two  thousand  years  ago — 
has  apparently  been  solved  through  the  assumption  that  the  length  of  the  day 
is  increasing  at  the  rate  of  one  two-hundredth  of  a  second  every  century.  As 
one  of  the  factors  which  increase  the  circumference  of  the  world,  the  building 
of  skyscrapers  in  New  York  is  seriously  considered  to  have  a  definite  influence, 
infinitesimally  small  though  it  may  be,  upon  the  day's  duration. — "Astronomy," 
A.  R.  Hinks,  p.  134. 


BAROMETRIC  SUMMARY  227 

Edison.  Impossible  though  it  is  for  any  individual  to  prede- 
termine precisely  what  economic  developments  will  bring  forth, 
no  small  measure  of  success  is  attainable  for  those  who  watch 
carefully  the  factors  which  are  most  likely  to  exert  the  largest 
influence  upon  changing  conditions. 

The  fallibility  of  commercial  barometers. — An  infallible 
business  barometer  does  not  exist.  Economics  in  fact,  is  an 
inexact  science.  Economic  laws  might  more  properly  be  termed 
economic  tendencies.  Economic  forces  do  not  invariably  have 
the  same  effect  and  therefore  laws  can  not  be  proved  with  the 
facility  which  obtains  in  the  exact  sciences,  such  as  mathematics, 
physics,  and  chemistry.  The  most  that  can  be  said  is  that  eco- 
nomic forces  tend  to  have  a  certain  effect. 

When  fundamental  laws  are  not  invariable  in  their  opera- 
tion, the  difficulty  of  predetermining  the  precise  effect  of  a 
single  economic  development,  or  a  group  of  developments, 
becomes  fraught  with  many  difficulties.  Although  agricultural 
production  has  truly  been  termed  the  fountain-head  of  com- 
mercial activity,  large  harvests  have  not  invariably  been  fol- 
lowed by  prosperous  days.  And  so  with  the  other  commercial 
barometers. 

No  single  barometer  can  be  accepted  as  definitely  indica- 
tive of  coming  events.  The  "shadow  which  is  cast  before" 
must  be  sought  in  diverse  developments  rather  than  through 
one  factor  alone.  The  range  of  fallibility  is  materially  les- 
sened when  several  indicia  forecast  a  similar  trend.  A  simul- 
taneous grouping  of  large  harvests,  favorable  bank,  statements, 
and  an  improvement  in  conditions  abroad  is  far  more  certain 
to  indicate  a  prospective  betterment  in  business  activity  than 
any  of  the  factors  individually. 

Business  barometers  as  causes  and  effects. — The  most  diffi- 
cult phase  of  business  forecasting  is  the  differentiation  between 
economic  phenomena  on  the  basis  of  cause  and  effect.  An  in- 
crease in  prices  serves  to  increase  industrial  profits  and  thus 
causes  industrial  production  to  be  enlarged.  And  subsequently 
the  increase  in  industrial  activity  causes  wages  to  be  increased 
and  hence  selling  prices  to  be  further  advanced.  So  an  in- 
crease in  prices  and  in  industrial  production  afct  both  as 
causes  and  effects  of  the  other.  Obviously,  the  problem  of 
forecasting  cannot  be  solved  through  an  elementary  divi- 
sion of  various  barometers  on  a  basis  of  cause  and  effect. 


228 


BUSINESS  FORECASTING 


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BAROMETRIC  SUMMARY 


229 


F      D      B      E      B 
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F      D      B      E      E 
F      D     E      B      F 

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LEGEND  OF  SYMBOLS                                    *n  tne  vertical  columns,  the  factors  are  treated  as  causes;    the  symbols  there- 

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D     Indirect;  partial  determinant.     Indirect;  caused  partly  by.     by  "F,"  etc. 
E     Indirect;  slight  influence.             Indirect;  slight. 

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230  BUSINESS  FORECASTING 

But  despite  the  constant  interplay  of  cause  and  effect,  cer- 
tain of  the  barometers  represent  causes  to  a  greater  degree 
than  effects.  An  attempt  to  chart  the  various  business  barom- 
eters in  their  relation  to  each  other  on  the  basis  of  cause 
and  effect  is  essayed  in  the  accompanying  table.  Any  classifica- 
tion similar  to  this  which  embraces  462  distinct  variations  of 
cause  and  effect  opens  the  way  to  considerable  difference  of 
opinion.  The  chart,  however,  has  been  painstakingly  prepared 
and  is  believed  to  contain  a  high  degree  of  accuracy. 

Summary  of  the  barometers  of  production. — Agricultural 
production  is  the  most  important  single  factor  which  influences 
business  conditions.  It  supplies  the  major  share  of  the  raw 
materials  used  in  manufacturing,  provides  employment  for  a 
larger  number  of  people  than  any  other  occupation,  and  defin- 
itely affects  the  earning  power  of  the  second  largest  industry — 
railroading.  Large  crops  usually  create  increased  business  activ- 
ity, and  small  corps  have  the  opposite  tendency.  A  favorable 
forecast  on  winter  wheat  production  in  the  April  Government 
crop  report  indicates  business  activity  during  the  spring 
and  fall  months;  and  a  favorable  forecast  on  the  crops  in 
general  in  the  September  report  foreshadows  commercial  ac- 
tivity during  the  fall  and  winter  months. 

Industrial  productivity  has  at  once  its  greatest  strength  and 
greatest  weakness  in  the  facility  with  which  the  output  is  con- 
trollable. Quite  invariably,  in  times  of  rising  prices,  the  en- 
ticement of  large  profits  leads  manufacturers  to  lose  a  proper 
perspective  of  the  entire  situation  and  to  increase  industrial  pro- 
duction well  beyond  the  point  of  balance  with  concurrent  condi- 
tions of  consumption.  By  a  converse  psychological  operation, 
activity  is  unduly  curtailed  during  periods  of  depression.  Sta- 
tistics of  industrial  production — pig  iron,  unfilled  steel  orders, 
raw  material  imports,  and  others — are  of  barometric  value 
chiefly  in  comparison  with  other  indicia,  such  as  agricultural 
production,  wages,  earnings,  financial  conditions  at  home,  and 
general  economic  conditions  abroad.  Industrial  production 
should  keep  pace  with  external  developments.  When  it  is 
out  of  balance,  either  above  or  below,  reaction  is  inevitable. 

Structural  production  is  treated  as  a  separate  phase  of  industry 
in  barometrics  inasmuch  as  the  individual  trends  substantially 
differ.  The  tendency  of  building  operations  to  diminish  as 
prices  rise  and  to  be  resumed  as  prices  fall  is  of  particular 
barometric  interest.     The  utility  of  this  barometer,  however, 


BAROMETRIC  SUMMARY  231 

is  considerably  reduced  from  a  practical  standpoint  by  reason 
of  the  inadequacy  of  the  statistics  available. 

Summary  of  the  barometers  of  marketing. — The  all-im- 
portance of  the  element  of  price  in  modern  business  makes 
changes  in  price  levels  of  major  significance  in  barometric 
work.  No  other  factor  more  truly  reflects  the  trend  in  busi- 
ness activity.  Prices  rise  during  periods  of  activity,  and  de- 
cline when  business  is  dull.  Just  as  the  abnormally  high 
levels  attained  during  times  of  prosperity  help  to  accomplish 
the  reaction  which  ensues,  just  so  do  the  abnormally  low  levels 
reached  during  periods  of  depression  aid  in  the  later  recovery. 
The  usual  sequence  with  which  prices  change  offers  a  fore- 
casting medium  of  special  value.  Prices  change  earliest  in 
raw  materials,  particularly  those  which  have  an  active  market 
on  the  commodity  exchanges,  such  as  cotton,  wheat,  coffee, 
sugar,  and  copper.  A  change  in  the  trend  of  prices  on  these 
commodities  forecasts  a  subsequent  change  in  semi-finished  and 
finished  products,  and  wholesale  prices  generally.  Retail  prices 
follow  wholesale  prices,  and  wages  of  labor  are  last  to  be 
affected. 

The  volume  of  commodity  shipments  serves  as  a  satisfactory 
index  of  current  activity.  Its  barometric  value  is  quite  limited, 
however,  because  it  follows  the  trend  of  agricultural  and  in- 
dustrial production.  Changes  in  the  volume  of  car  loadings 
and  idle  cars  do  not  indicate  subsequent  changes  in  produc- 
tivity; rather  does  a  change  in  productivity  forecast  changes  in 
conditions  of  transportation. 

Foreign  trade  statistics  must  be  carefully  interpreted  to 
be  of  barometric  utility.  Due  to  the  effect  of  price  changes 
the  value  of  the  trade  is  of  much  less  importance  than  the  vol- 
ume. The  total  of  exports,  under  present  conditions,  is  of 
less  significance  than  the  total  of  imports.  The  dependence  of 
American  industry  upon  foreign  buyers  has  been  overempha- 
sized as  the  value  of  manufactured  products  exported  aver- 
ages materially  less  than  10  per  cent  annually  of  the  total 
value  of  domestic  production.  European  imports  have  a 
particular  value  as  a  criterion  of  the  degree  of  economic  recov- 
ery in  that  continent. 

Retail  sales  have  little  barometric  value.  They  are  about 
the  last  to  be  affected  by  changing  conditions.  A  general 
improvement  or  retrogression  through  almost  the  entire  field 
is  necessary  before  reflection  may  be  noted  in  retail  sales. 


232  BUSINESS  FORECASTING 

Summary  of  the  barometers  of  labor  conditions. — Employ- 
ment conditions  are  reflected  in  the  trend  of  wages  and  of 
controversies.  Wages  almost  invariably  follow  the  course 
of  business  conditions,  increasing  in  times  of  activity  and  lower- 
ing in  periods  of  inactivity.  Toward  the  close  of  a  period  of 
prosperity  wages  tend  to  increase  more  rapidly  than  profits 
and  bring  about  the  controversies  which  become  more  fre- 
quent at  this  time — an  indication  that  business  activity  has 
about  reached  its  peak.  During  a  period  of  depression,  wages 
decline  even  below  reasonable  minima  and  thus  require  an  up- 
ward adjustment  even  when  conditions  are  inactive.  Slight 
though  such  an  increase  may  be,  it  indicates  that  the  darkest 
hour  has  passed  and  that  recovery  is  not  far  distant. 
Under  new  restrictive  legislation,  immigration  figures  have 
lost  a  great  part  of  their  barometric  significance. 

Summary  of  the  barometers  of  business  profits. — Corporate 
earnings  are  without  special  barometric  value.  The  informa- 
tion obtainable,  from  a  forecasting  standpoint,  is  usually  ob- 
solete before  it  is  published;  and1  even  then  rarely  differs  from 
that  which  preceding  conditions  indicated  in  advance. 

The  number  of  commercial  failures  is  valuable  because  it 
indicates  accurately  and  promptly  the  trend  of  business  events. 
A  very  low  number  of  failures  in  comparison  with  preceding 
periods  indicates  that  business  is  extremely  active,  that  prices 
are  rising,  and  that  profits  are  fairly  easily  secured.  But  most 
of  all  it  forecasts  the  end  of  the  era  of  prosperity,  as  the 
months  immediately  preceding  the  transition  from  a  period  of 
activity  to  one  of  dullness  show  commercial  failures  at  their 
lowest  ebb. 

New  security  issues  have  thus  far  proved  of  practically  no 
barometric  value.  Whatsoever  utility  may  reside  in  this  fac- 
tor has  been  lost  in  the  inadequacy  of  the  statistics  which  have 
hitherto  been  available  on  the  subject. 

Summary  of  the  barometers  of  the  exchanges. — As  prices 
on  the  stock  exchanges  represent  the  consensus  of  opinion 
of  well-informed  men  as  to  the  future  course  of  earnings  of 
the  large  industrial  enterprises  of  the  country,  the  trend  of 
conditions  should  logically  find  expression  in  these  prices  be- 
fore elsewhere.  In  a  constant  endeavor  to  discount  the  future, 
traders  buy  or  sell  securities  in  accordance  with  the  prospective 
effect  of  expected  developments.  The  prices  of  industrial 
securities,  especially  those  of  companies  chiefly  interested  in  raw 


BAROMETRIC  SUMMARY  233 

materials  and  producers'  goods,  offer  the  best  criterion  for  judg- 
ing the  impending  course  of  events. 

Prices  on  the  commodity  exchanges  reflect  an  even  more 
scientific  study  of  future  probabilities  than  do  those  on  the 
stock  exchanges.  Prices  rise  or  fall  in  accordance  with  the 
relative  balance  in  conditions  of  supply  and  demand.  Any 
lack  of  balance  is  most  quickly  appreciated  on  these  exchanges 
and  finds  almost  immediate  expression  in  current  prices.  As 
changes  in  prices  on  the  commodity  exchanges  begin  a  se- 
quence of  price  changes  that  travels  throughout  the  business 
world,  the  action  of  the  commodity  exchanges  serves  as  an 
important  barometer  of  forthcoming  changes  in  the  business 
weather. 

Fluctuations  in  foreign  exchange  rates  are  of  chief  baro- 
metric value  as  a  criterion  of  economic  conditions  abroad. 

Summary  of  the  barometers  of  finance. — Bank  clearings 
reflect  business  which  was  transacted  in  the  immediate  past 
rather  than  currently.  Changes  in  price  levels  between  the 
date  of  contract  and  the  date  of  payment,  the  time  involved 
in  manufacture,  and  the  customary  terms  of  credit,  all  tend 
to  make  current  bank  clearings  more  representative  of  business 
as  it  was  from  two  to  three  months  ago  than  as  it  now  is. 
Moreover,  bank  clearings,  standing  alone,  are  quite  without  sig- 
nificance as  to  future  tendencies. 

Bank  statements — especially  the  weekly  statement  of  con- 
dition of  the  combined  Federal  Reserve  banks — are  invalu- 
able as  business  barometers.  They  reflect  the  condition  of 
credit  availability  in  the  country — a  factor  of  large  signifi- 
cance in  view  of  the  absolute  dependence  of  modern  business 
upon  an  adequacy  of  credit.  A  period  of  increased  business 
activity  is  possible  only  when  credit  conditions  are  favorable. 
The  increase  in  activity  brings  a  corresponding  increase  in 
the  demand  for  loans,  and  as  the  period  continues  the  credit 
availability  at  the  banks  is  substantially  reduced  until  such 
time  as  curtailment  of  loans  becomes  imperative.  This  devel- 
opment in  the  business  situation  is  revealed  in  the  weekly 
bank  reports  which  permit  even  a  casual  observer  of  the  re- 
serve ratio  to  keep  in  intimate  touch  with  the  current  condition. 
of  credit. 

When  bank  statements  were  rendered  at  rare  intervals,  as 
was  the  case  prior  to  the  organization  of  the  reserve  banks, 
interest  rates  afforded  the  most  satisfactory  method  of  judg- 


234  BUSINESS  FORECASTING 

ing  the  condition  of  the  money  market.  Under  the  present 
practice  of  weekly  representative  bank  statements,  interest 
rates  have  become  of  relatively  minor  barometric  utility.  The 
rates  vary  as  a  result  of  changing  conditions  of  credit,  a  de- 
velopment which  can  now  be  closely  observed  through  the 
bank  statements.  Eventually  the  discount  rates  set  by  the 
Federal  Reserve  banks  will  dominate  the  market  commercial 
rate  in  the  United  States  in  a  manner  similar  to  the  manner 
in  which  the  Bank  of  England  discount  rate  dominates  money 
rates  over  there;  but  this  desideratum  has  yet  to  be  reached. 

Because  of  the  operation  of  gold  export  embargoes  in  prac- 
tically all  nations  of  the  world  except  the  United  States,  interna- 
tional movements  of  gold  have  entirely  lost  their  prewar 
significance.  Gold  no  longer  flows  as  a  natural  resultant  of  debit 
balances  between  countries.  The  position  of  this  country  as  the 
leading  creditor  nation  gives  it  command  of  most  of  the  gold 
stock  of  the  world.  New  gold  which  comes  into  the  United  States 
may  serve  either  of  two  purposes,  namely,  as  a  basis  for  ad- 
ditional credit  expansion,  or,  to  strengthen  the  reserves  against 
credit  already  outstanding.  The  alternative  chosen  is  largely 
dependent  upon  the  policy  adopted  by  the  Federal  Reserve 
Board  which,  at  least  during  the  period  from  June  of  1920 
to  June  of  1921,  elected  to  utilize  the  enormous  gold  increase 
to  strengthen  credit  reserves  and  thereby  brought  the  reserve 
ratio  from  slightly  over  40  per  cent  in  1920  to  over  60  per  cent 
in  1921. 

The  fiscal  operations  of  the  United  States  Government  have 
become  a  barometer  of  importance  inasmuch  as  they  indicate 
forthcoming  taxation  policies.  Taxation  has  become  an  in- 
fluencing factor  upon  business  conditions.  Changes  in  taxes 
can  be  predetermined  more  readily  through  observation  of 
the  relationship  between  current  Federal  revenues  and  expendi- 
tures as  it  appears  in  the  daily  statements  of  the  Treasury  De- 
partment than  through  any  other  single  source. 

Barometric  ranking. — The  foregoing  summary  leads  to  a 
direct  comparison  of  the  forecasting  utility  of  all  the  various 
barometers  which  have  been  discussed.  Such  comparison  must 
naturally  be  made  on  the  practical  basis  of  the  information 
which  is  actually  available  irrespective  of  whatever  theoretical 
barometric  superiority  may  be  invested  in  certain  of  the  baro- 
meters concerning  which   adequate   information   is   not   thus 


BAROMETRIC  SUMMARY  235 

far  obtainable.     On  this  basis  the  different  indicia  are  arbi- 
trarily divided  into  five  classes  in  the  order  of  their  importance. 

The  first  class  includes  seven  barometers,  each  of  definite 
intrinsic  barometric  value.  As  a  single  group  they  constitute 
a  simple  forecasting  unit  which  embraces  all  the  major  fac- 
tors influencing  business  conditions. 

GROUP  I. 

A-l.  Agricultural  production. 

( a )  The  April  report  on  winter  wheat. 

(b)  The  September  general  report. 
A-2.   Bank  statements. 

(a)  The  weekly  Federal  Reserve  Report. 

( 1 )  Reserve  ratio. 

(2)  Bills  discounted. 

(3)  Notes  in  circulation. 

(b)  The  weekly  statement  of  reporting  member  banks. 
( 1 )    Loans  and  discounts. 

A-3.   Railroad  net  earnings. 

A-4.   Commodity  exchange  quotations. 

Wheat-cotton-corn-copper-wool-hides-rubber. 
A-5.   Industrial  production. 

(a)  Pig  iron. 

(b)  Bituminous  coal. 
A-6.  Stock  exchange  quotations. 

(a)    Average  of  ten  industrial  common  stocks. 

United  States  Steel — General  Electric — American 
Locomotive — Kennecott  Copper — American  Wool 
— American  Hide  and  Leather — Allis-Chalmers 
— United  States  Rubber — National  Lead — Inter- 
national Paper. 
A-7.  Business  failures. 

GROUP  II. 
B-l.  Prices. 

(a)    Department  of  Labor  Wholesale  Price  Index. 
B-2.   Industrial  controversies. 

GROUP  III. 

C-l.   Interest  rates. 

(a)  Commercial  rate  on  prime  90-day  two-name  paper. 

(b)  The  call  loan  rate. 

(c)  The    discount   rate    on    commercial    loans    at   the 
Federal  Reserve  Bank  of  New  York. 


236  BUSINESS  FORECASTING 

C-2.  Gold  movements. 

(a)    The   balance    of   shipments    for   the   month   and 
calendar  year  to  date. 
C-3.   Foreign  trade. 

(a)  The  value  of  imports  from  Europe. 

(b)  The  value  of  manufactures  exported. 

(c)  The  quantity  of  raw  materials  imported. 
C-4.   New  building  operations. 

C-5.   Federal  finance. 

(a)    The  relationship  between  total  ordinary  revenues 
and  expenditures  for  the  fiscal  year  to  date. 
C-6.   Foreign  exchange  rates. 

GROUP  IV. 
D-l.   Bank  clearings. 
D-2.   Commodity  shipments. 

(a)  Weekly  car  loadings. 

(b)  Weekly  idle  cars. 

GROUP  V. 

E-l.  Wages. 

E-2.  General  corporate  earnings. 

(a)  Quarterly  reports.    . 

(b)  Annual  reports. 
E-3.   New  security  issues. 

Composite  barometers. — In  view  of  the  large  variance  in 
the  significance  and  the  relative  importance  of  the  different 
indicia  of  business  conditions,  a  logical  development  would 
be  the  construction  of  a  single  barometer  which  would  show 
the  composite  effect  of  the  influencing  factors.  Obstacles  which 
appear  almost  unsurmountable  are  met  at  the  outset,  however, 
and  make  the  task  by  far  the  most  difficult  in  commerce. 

The  first  problem  lies  in  the  selection  of  the  indicia.  In 
the  present  volume,  the  individual  barometers  are  discussed 
under  seven  main  classes  which  are  divided  into  twenty-two 
subdivisions  which  in  turn  comprise  many  smaller  classifica- 
tions. Obviously  it  would  be  impracticable  to  include  all  of  the 
separate  indicia  in  constructing  a  composite  barometer.  On 
the  other  hand  no  consensus  of  opinion  exists  as  to  which 
should  be  chosen.  The  composite  barometer  which  is  probably 
most  highly  regarded  in  the  United  States  at  the  present  time 


BAROMETRIC  SUMMARY  237 

does  not  include   agricultural  production  as   one   of  the  in- 
fluencing factors! 

The  second  problem  is  to  determine  the  relative  importance 
of  the  indicia  chosen  so  that  each  may  receive  proper  weight. 
It  would  be  unreasonable  to  ascribe  to  the  volume  of  new 
security  issues  an  importance  equivalent  to  that  of  business 
failures.  Again  uniform  opinion  is  lacking.  Bank  clearings, 
for  illustration,  are  generally  regarded  as  having  greater  sig- 
nificance than  is  stated  in  the  present  volume. 

The  third  problem  is  to  combine  factors  which  have  many 
elements  of  dissimilarity.  Not  only  are  units  different — vol- 
ume, value,  and  percentages — but  also  are  trends  because 
some  precede  the  major  swing,  some  move  with  it,  and  the 
others  follow.  In  a  period  of  liquidation,  bank  clearings  do 
not  immediately  fall  off  but  prices  decline.  In  a  composite 
barometer  the  effect  of  the  inclusion  of  bank  clearings  at  such 
a  time  would  be  to  neutralize  the  effect  of  the  decline  in  prices. 

Moreover  there  are  certain  indicia  which  cannot  be  stated 
statistically  or  graphically,  and  which  therefore  could  not  be 
included  in  a  composite  barometer.  These  include  factors 
such  as  economic  conditions  abroad,  commercial  legislation  at 
home — tariff,  taxes,  etc. — conditions  of  employment,  and  poli- 
tics. 

The  Harvard  index  of  general  business  conditions. — In 
connection  with  the  preceding  paragraphs  brief  mention  of  two 
of  the  leading  American  composite  barometers  should  be  of  in- 
terest.4 The  Harvard  Index  of  General  Business  Conditions  is 
really  three  composite  barometers  rather  than  one,  the  three 
groups  covering  speculation,  business,  and  banking.  Each  of  the 
three  groups  includes  four  indicia,  which  makes  a  total  of 
twelve  separate  barometers  used  in  the  construction  of  the 
index.    The  twelve  are  as  follows: 

Group  I. — Speculation. 

1.  Bank  clearings  of  New  York  City. 

2.  Average  price  of  industrial  stocks. 

3.  Average  price  of  railroad  stocks. 

4.  Average  price  of  railroad  bonds. 

*"The  Index  of  General  Business  Conditions"  prepared  by  the  Committee 
on  Economic  Research  at  Harvard  University,  and  "The  Annalist  Barometer 
and  Business  Index  Line."  Other  composite  barometers  include  the  "Babson 
Compositplot  of  American  Business  Conditions,"  prepared  by  Babson's  Sta- 
tistical Organization ;  and  "Brookmire's  Forecaster,"  prepared  by  The  Brook- 
mire   Economic   Service. 


238  BUSINESS  FORECASTING 

Group  II. — Business. 

1.  Bank  clearings  outside  of  New  York  City. 

2.  Bradstreet's  Index  of  Wholesale  prices. 

3.  U.  S.  Dept.  of  Labor  Index  of  Wholesale  prices. 

4.  Pig  iron  production. 

Group  III. — Banking. 

1.  Interest  rate  on  60-90  day  paper  in  New  York. 

2.  Interest  rate  on  4-6  months  paper  in  New  York. 

3.  Loans  of  New  York  City  Clearing  House  banks. 

4.  Deposits  of  New  York  City  Clearing  House  banks. 

The  twelve  barometers  used  may  be  summarized  into  six: 
(1)  bank  clearings,  (2)  security  prices,  (3)  wholesale  com- 
modity prices,  (4)  pig  iron  production,  (5)  interest  rates, 
and  (6)  condition  of  the  New  York  City  banks.  It  is  there- 
fore significant  to  list  the  important  indicia  which  are  not 
considered:  (1)  agricultural  production,  (2)  condition  of  the 
Federal  Reserve  system,  (3)  railroad  earnings,  (4)  business 
failures,  (5)  commodity  exchange  quotations,  (6)  foreign 
trade,  (7)  building  operations,  (8)  commodity  shipments, 
and  (9)  wages.  The  writer  is  reluctant  to  believe  that 
a  satisfactory  index  of  business  conditions  can  be  constructed 
without  including  at  least  some,  if  not  all,  of  the  nine  indicia 
which  are  excluded  from  the  Harvard  index. 

"The  Annalist"  barometer  and  business  index  line. — Inas- 
much as  the  Annalist  Barometer  includes  but  four  indicia — 
wholesale  prices,  pig  iron  production,  bank  clearings,  and  the 
interest  Tate  on  60-90  day  commercial  paper — it  is  open  to 
even  greater  objection  for  indicia  excluded  than  the  Harvard 
index.  It  is  accordingly  even  more  difficult  to  believe  that 
the  Annalist  Business  Index  Line  satisfactorily  reflects  the 
trend  of  business  conditions.  In  view  of  the  important  indicia 
omitted — and  it  is  significant  to  note  that  three  out  of  the  four 
included  are  primarily  effects  and  not  causes — the  Annalist 
Barometer  has  little  scientific  foundation.5 

New  barometers,  actual  and  prospective. — At  no  time  in 
the  past  has  greater  interest  been  taken  in  the  subject  of  in- 
telligent business  forecasting  than  is  manifest  as  the  present 

6  "The  present  index  line  is  frankly  empirical  and  its  value  as  a  forecaster 
of  the  future  is  predicated  wholly  on  its  success  in  the  past."—  The  Annalist 
vol.  17,  No.  428,  p.  377. 


BAROMETRIC  SUMMARY  239 

volume  is  being  written.  During  the  first  half  of  1921  two 
new  barometers  have  been  started,  one  being  the  monthly  sur- 
vey of  employment  conditions  by  the  Department  of  Labor,6 
and  the  other  the  monthly  report  on  new  security  issues  by 
The  Financial  and  Commercial  Chronicle.1  A  comprehensive 
production  and  trade  index  is  being  evolved  by  the  Federal 
Reserve  Bank  of  New  York,  which  should  shortly  be  available 
and  which  should  prove  of  invaluable  assistance  in  barometric 
work.8 

But  even  greater  development  along  barometric  lines  is 
necessary  if  a  maximum  degree  of  accuracy  is  to  be  attained  in 
business  forecasting.  An  index  of  actual  industrial  production 
is  needed  to  cover  weekly  and  monthly  output  records  of  lead- 
ing manufacturers  of  semi-finished  and  finished  products.  An 
index  of  retail  prices  which  would  approach  in  accuracy  cur- 
rent indexes  of  wholesale  prices  would  be  serviceable.  An  in- 
dex which  would  show  collection  conditions  throughout  the 
country  at  least  once  monthly  would  provide  a  criterion  by 
which  relative  financial  stringency  could  be  measured.9  A  com- 
prehensive record  of  building  operations  in  actual  progress 
throughout  the  country  would  be  infinitely  preferable  to  the 
present  method  of  compiling  the  total  value  of  building  per- 
mits and  contracts  awarded  in  certain  sections.10 

But  the  greatest  of  all  is  the  need  of  a  method  of  accurately 
forecasting  weather  conditions  beyond  a  few  days  in  advance. 
This  problem  is  one  in  applied  meteorology  rather  than  in 
applied  economics,  yet  its  solution  will  be  of  the  utmost  im- 
portance to  the  commercial  world.     Inability  to  regulate  agri- 

8  Reference  has  previously  been  made  in  Part  II,  Chapter  VIII. — Monthly 
Labor  Review,  vol.  XII,  No.  1,  p.  143. 

7  Previous  reference  appears  in  Part  II,  Chapter  IX. — The  Financial  and 
Commercial  Chronicle,  vol.  112,  No.  2909,  p.  1216. 

8  For  previous  reference,  see  Part  II,  Chapter  VI. — The  American  Economic 
Review,  vol.  XI,  No.   1,  p.  70. 

9  "Methods  of  Developing  an  Index  of  Collection  Conditions,"  W.  H.  Steiner, 
in  Quarterly  Publication  of  the  American  Statistical  Association,  vol.  XVII, 
No.  132,  p.  426. 

10  At  the  First  Federal  Conference  on  Business  Conditions  Reporting,  held 
at  Washington,  Feb.  21-22,  1921,  Prof.  Melvin  T.  Copeland  stated  that  addi- 
tional statistics  were  needed  in  four  groups:  production,  prices,  mercantile 
trade,  and  credits.  Production  statistics  should  include  copper,  rubber  manu- 
factures, clothing,  flour,  canned  goods,  machinery,  farm  implements,  builders' 
hardware,  jewelry,  musical  instruments,  and  silk  goods.  "Our  production 
statistics   also  should  be  made   available   promptly,   ordinarily  within    10   days 


240  BUSINESS  FORECASTING 

cultural  production  because  of  uncertain  climatic  conditions  has 
an  influence  greater  than  that  of  any  other  single  factor  upon 
the  phenomenon  of  the  business  cycle.11 

Future  barometric  progress. — Despite  the  fact  that  certain 
new  barometers  which  are  now  being  developed  will  prove  of 
undoubted  assistance  in  business  forecasting,  the  time  is  close 
at  hand  when  further  barometric  progress  will  be  restricted  to 
the  refinement  of  the  indicia  which  are  already  available.  In 
an  effort  to  find  new  methods  of  predetermining  business  con- 
ditions, economic  research  has  covered  practically  the  entire 
field  of  commercial  endeavor  and  has  found  barometric  utility 
in  almost  one  hundred  indicia  of  business  conditions  of  which 
about  twenty-five,  as  taken  up  in  the  present  volume,  are  of  ma- 
jor significance.  It  would  be  unreasonable  to  expect  that  fur- 
ther research  will  disclose  many  new  business  barometers,  and 
illogical  to  devote  considerable  effort  to  searching  for  new 
indicia  while  present  barometers  are  but  imperfectly  under- 
stood. The  deficiencies  in  the  present  barometers  are  not  attri- 
butable to  inherent  faults  but  to  inadequate  development. 

Moreover  little  forecasting  assistance  may  be  expected  from 
barometers  of  a  freakish  nature  which,  through  mechanical  de- 
sign or  otherwise,  endeavor  automatically  to  unfold  the  busi- 
ness future.  Business  conditions  are  susceptible  to  the  influence 
of  so  many  factors  that  it  is  quite  impossible  to  resolve  them  all 
into  any  contrivance  which  will   automatically  foretell   future 


of  the  end  of  the  month  to  which  they  apply.  If  a  two-month's  interval 
elapses  before  the  statistics  are  published,  the  figures  oftentimes  are  stale 
for  practical  use  in  judging  current  business  conditions."  Price  statistics 
should  include  comparative  movements  according  to  commodity  groups.  Mer- 
cantile trade  statistics  should  give  monthly  reports  on  sales,  purchases,  and 
inventories.  Monthly  reports  should  be  compiled  showing  retail  and  whole- 
sale credit  conditions. — Federal  Reserve  Bulletin,  vol.  7,  No.   3,  p.  291. 

11  It  is  encouraging  to  note  that  the  Department  of  Commerce  has  taken  a 
deep  interest  in  the  preparation  of  business  statistics.  In  view  of  recent 
statements  by  Herbert  Hoover,  it  would  not  be  surprising  if  the  Department 
should  undertake  the  preparation  of  statistics  which  are  not  now  available. 
In  The  Nation's  Business  for  June,  1921,  (p.  12)  Mr.  Hoover  is  quoted  as 
follows:  "What  I  mean  is  that  we  should  have  more  timely,  more  regular 
and  more  complete  information  of  the  current  production  and  consumption 
and  stocks  of  every  great  commodity  in  the  United  States.  I  am  convinced 
that  we  should  go  even  further  than  this;  that  we  should  secure  and  publish 
the  proportion  of  the  total  equipment  of  more  important  industries,  that  is, 
in  current  production,  together  with  total  proportion  of  labor  complement  that 
is  in  service;  and  that  in  a  few  commodities  it  may  be  well  to  procure  and 
publish  the  primary  prices." 


BAROMETRIC  SUMMARY  241 

economic  developments.  Furthermore,  the  utility  of  any  baro- 
meter depends  primarily  upon  the  intelligence  with  which  it 
is  interpreted.  No  real  business  man  will  ever  ask  or  expect  a 
device  which  will  relieve  him  of  the  burden  of  thinking.12 

u  Since  this  chapter  was  written,  the  Department  of  Commerce  has  begun  the 
publication  of  a  monthly  "Survey  of  Current  Business"  which  is  a  statistical 
compilation  of  the  various  indexes  of  production  and  marketing.  The  Survey 
contains  many  indexes  which  are  not  specifically  covered  in  this  book  because  of 
limited  barometric  value.  The  chief  objection  to  the  Survey  is  that  it  is  issued 
too  long  after  the  information  has  become  current.  This  disadvantage  can  be 
remedied  by  issuing  the  Survey  weekly  and  having  it  cumulative  for  the  month. 


Part  III 
BUSINESS   CRISES  IN  THE  UNITED  STATES 


243 


Chapter  XIII 
THE  PRINCIPAL  AMERICAN  CRISES 

Frequency  of  American  business  crises. — The  annals  of 
American  business  from  1800  to  1921  include  seven  major 
crises  which  developed  in  the  following  years,  namely,  ( 1 ) 
1837,  (2)  1857,  (3)  1873,  (4)  1884,  (5)  1893,  (6)  1907, 
and  (7)  1920.  Minor  disturbances  occurred  in  1814,  1818, 
1825,  1829,  1848,  1866,  1903,  and  1913.  The  elapsed  time 
between  the  major  crises  was  respectively  20,  16,  11,9,  14,  and 
13,  years.  If  the  minor  crises  are  included  the  elapsed  time 
was  4,  7,  4,  8,  1 1,  9,  9,  7,  1 1,  9,  10,  4,  6,  and  7  years.  While 
a  greater  degree  of  periodicity  is  found  in  the  recurrence 
of  the  major  crises  than  in  the  elapsed  time  between  all  crises, 
in  neither  case  have  the  intervening  intervals  been  sufficiently 
regular  to  substantiate  a  theory  of  true  periodicity.  "Seven 
years  of  plenty  followed  by  seven  years  of  want"  has  not  been 
the  accurate  story  of  American  business. 

Alternate  periods  of  prosperity  and  depression  are  the 
results  of  cumulated  change,  as  has  been  shown  in  the  earlier 
description  of  the  business  cycle,  but  an  analysis  of  the  various 
factors  which  contribute  to  the  change  does  not  warrant  the 
belief  that  a  fixed  regularity  exists  in  their  operation.  Upon 
two  occasions — the  outbreak  of  the  Civil  War  in  1861  and 
the  World  War  in  1914 — developments  which  ordinarily  are 
not  considered  in  the  establishment  of  a  theory  of  periodicity 
in  business  cycles,  have  thrown  commerce  entirely  out  of  its 
accustomed  channels,  have  necessitated  radical  changes  in 
business  methods,  and  have  completely  altered  the  results 
which  would  have  obtained  had  the  old  order  remained. 

Changes  in  the  nature  of  crises. — In  the  brief  summary 
of  the  major  crises  of  the  United  States  which  appears  in  the 
following  pages,  a  material  change  in  the  nature  of  succeeding 
crises  is  noteworthy.  Economic  conditions  were  vastly  differ- 
ent in  the  early  nineteenth  century  from  those  in  the  early 
twentieth.      Agriculture   was   then   the   chief   occupation   and 

245 


246  BUSINESS  FORECASTING 

engaged  the  attention  of  more  than  75  per  cent  of  the  people. 
The  population  was  relatively  small,  being  but  17,000,000  in 
1840.  Facilities  of  transportation  and  communication  were 
decidedly  poor,  as  the  railroad  development  did  not  come  until 
nearly  the  middle  of  the  century.  From  a  political  aspect,  the 
nation  was  none  too  strong.  The  twenty  years  estimated  by 
Washington  as  necessary  to  weld  the  country  together  proved 
a  conservative  prediction.  Federal  finances  were  in  deplorable 
condition  until  well  after  1 820.  A  shortage  of  monetary  metal 
compelled  the  issuance  of  a  superabundance  of  paper  currency.1 

The  last  half  of  the  nineteenth  and  the  first  twenty  years  of 
the  twentieth  century  witnessed  a  striking  change.  The  inven- 
tion of  the  steam  engine  and  its  application  to  transportation 
and  to  industry  and  the  development  of  the  use  of  electrical 
power  proved  momentous  factors  in  the  rising  importance  of 
industrial  production.  Improved  facilities  in  transportation  and 
communication,  large  scale  manufacturing  made  possible 
through  new  machinery  and  the  corporate  form  of  business 
organization,  and  a  tremendous  increase  in  the  use  of  credit  in 
business,  all  tended  to  put  the  conduct  of  business  on  a  plane 
vastly  different  from  that  occupied  in  the  early  nineteenth 
century.2 

With  the  entire  institution  of  business  in  the  process  of  ma- 
terial change,  the  commercial  disturbances  which  meantime 
arose  differed  from  those  which  preceded  and  followed.  The 
earlier  crises  are  attributable  to  causes  such  as  specie  shortage, 
overexpansion  of  railroads,  and  the  building  of  public  works; 
whereas  recent  disturbances  are  due  more  to  reasons  such  as 
industrial  overproduction  and  credit  inflation. 

The  earlier  crises. — The  economic  disturbances  which  de- 
veloped in  the  United  States  in  1814  and  1818  were  chiefly 
due  to  the  unsatisfactory  banking  policies  in  practice.  After 
Congress  refused  to  extend  the  charter  of  the  First  Bank  of 
the  United  States  in  1811 — a  most  unfortunate  act  as  later 
developments  proved — hundreds  of  State  banks  entered  the 
field.  A  vast  increase  in  the  volume  of  outstanding  credit  re- 
sulted through  loans  and  note  issues  by  these  new  banks,  enor- 
mously out  of  proportion  to  the  specie  reserves  held  at  the 
time.    In  the  meanwhile  the  War  of  1812  had  begun  and  was 

1  "Financial  History  of  the  United  States"  D.  R.  Dewey,  p.  76. 
'"Syllabus  of  Lectures  on  Panics  and  Depressions,"  W.  H.  Lough,  Jr.,  p.  3. 


THE  PRINCIPAL  AMERICAN  CRISES        247 

TABLE  No.  89.— CONDITION  OF  BANKS  IN  THE  UNITED  STATES 

1811-1816* 

Number  of 

Year                    banks  Capital  Circulation                Specie 

1811 88  $52,000,000  $28,000,000  $15,000,000 

1815 208  82,000,000  45,000,000  17,000,000 

1816 246  89,000,000  68,000,000  19,000,000 

*  "A  Brief  History  of  Panics  in  the  United  States,"  C.  Juglar,  p.  36. 

going  none  too  favorably  for  the  United  States,  with  corre- 
sponding adverse  effect  upon  banking  confidence.  The  capture 
of  the  city  of  Washington  by  the  British  on  August  24,  1814, 
was  followed  by  a  suspension  of  the  Philadelphia  and  New 
York  banks.     The  banks  remained  closed  until  1817. 

The  period  of  depression  which  began  in  1814  lasted  until 
1820.  Business  conditions  in  1819  were  particularly  poor.3 
Even  the  rectification  of  the  error  of  1811 — when  the  charter 
of  the  First  Bank  of  the  United  States  was  permitted  to  ex- 
pire— through  the  chartering  of  a  Second  Bank  of  the  United 
States  in  1816  failed  to  prove  of  assistance  until  well  after 
1820. 

The  crisis  of  1837. — Business  conditions  during  the  period 
from  1820  to  1837  were  in  marked  contrast  to  those  which 
existed  during  the  six  years  immediately  preceding.  The  com- 
pletion of  the  Erie  Canal  in  1825  was  the  first  great  step  in 
the  opening  of  the  West,  and  served  as  a  stimulus  for  similar 
projects  throughout  the  North  and  East.  Steam  railroads 
were  proved  practicable  by  1830  and  extensive  construction  was 
in  progress  within  a  few  years  thereafter.  The  financial  po- 
sition of  the  Government  had  improved  to  such  an  extent  that 
the  entire  national  debt  was  redeemed  by  1835  and  a  surplus 
of  $26,749,803  was  on  hand  on  January  1,  1836.4  With  the  ex- 
ception of  a  small  reserve,  this  surplus  was  divided  among 
the  State  governments.  Public  projects — banking,  canals,  and 
railroad  construction — were  undertaken  in  the  enthusiasm  of 
the  moment  without  conservative  regard  for  productive  power 

"'Distress  was  severe  throughout  the  country;  many  laborers  were  thrown 
out  of  employment;  prices  of  exportable  articles  fell;  and,  in  general,  a 
readjustment  of  values  was  forced  upon  the  country.  Contraction  of  credits 
by  the  banks  in  their  endeavor  to  obtain  a  specie  basis  in  1817  also  contributed 
to  diminish  the  credit  facilities  which  the  banks  could  afford  to  importers;  the 
State  banks  reduced  their  note  issues  from  $100,000,000  in  1817  to  $45,000,000 
in  1819." — "Financial  History  of  the  United  States,"  D.  R.  Dewey,  p.  166. 

*  "History  of  Modern  Banks  of  Issue,"  C.  A.  Conant,  p.  626. 


248  BUSINESS  FORECASTING 

m  the  immediate  future.     Speculation,  especially  in  land,  be- 
came rampant. 

Factors  other  than  speculation  and  unproductive  projects 
also  contributed  to  the  reaction  of  1837.  Congress  refused 
to  extend  the  charter  of  the  Second  Bank  of  the  United 
States  which  expired  in  1836.  The  Coinage  Act  of  1834 
changed  the  ratio  of  the  relative  value  of  gold  and  silver  under 
the  bimetallic  system  which  then  prevailed  from  the  old  ratio 
of  15  to  1 — which  undervalued  gold  and  hence  kept  it  from 
circulation,    thereby   protecting   reserves — to    a    new    ratio   of 

TABLE  No.  90.— BANK  EXPANSION  IN  THE  UNITED  STATES,  1829-1845* 

(amounts  in  millions  of  dollars) 

Number  of 

Year                             banks  Capital            Circulation  Loans 

1829 329  110.2  48.2  137.0 

1834 506  200.0  94.8  324.1 

1835 704  231.2  103.7  365.2 

1836 713  251.9  140.3  457.5 

1837 788  290.8  149.2  525.1 

1838 829  317.6  116.1  485.6 

1839 840  327.1  135.2  492.3 

1840 901  358.4  107.0  462.9 

1841 784  313.6  107.3  386.5 

1842 692  260.2  83.7  324.0 

1843 691  228.9  58.6  254.5 

1844 696  210.9  75.2  294.9 

1845 707  206.0  89.6  288.6 

*  "Financial  History  of  the  United  States,"  D.  R.  Dewey,  p.  225. 

16  to  1 — which  overvalued  gold  and  hence  forced  it  into  cir- 
culation and  out  of  the  country.5  In  1836,  the  Treasury  De- 
partment refused  to  accept  other  than  specie  in  payment  for 
public  lands,  and  thus  put  a  decided  check  upon  speculation  in 
this  field.  The  failure  of  the  agricultural  crops  in  1835  and 
1837  was  an  additional  unfavorable  factor. 

Public  meetings  held  in  New  York  protesting  against  high 
commodity  prices  early  in  1837  indicated  that  the  end  of  the  pe- 
riod of  prosperity  was  close  at  hand.  The  crisis  came  on 
April  1,  1837,  and  during  the  following  ten  days  128  commer- 


5  In  1834  the  ratio  on  the  basis  of  the  relative  market  value  of  gold  and 
silver  was  15i  to  1.  At  15  to  1,  gold  was  undervalued;  at  16  to  1,  silver  was 
undervalued. 


THE  PRINCIPAL  AMERICAN  CRISES        249 

cial  failures  were  reported  in  New  York  City.  Specie  pay- 
ments were  suspended  by  the  banks  on  May  10  and  were  not 
resumed  until  the  following  year.  The  depression  in  busi- 
ness continued  until  1840. 

The  crisis  of  1857. — Liquidation  was  so  thorough  during 
the  three  years  of  depression  immediately  preceding  1840  that 
the  ensuing  period  of  recovery  was  long  sustained.  A  failure 
of  the  principal  European  crops  in  1845,  1846,  and  1847  was 
but  a  single  factor  contributing  to  the  general  prosperity  in  this 
country.  The  Mexican  War  in  1847  stimulated  commerce 
through  abnormal  Federal  expenditures  in  the  same  manner 
although  to  a  lesser  degree  as  did  the  recent  World  War. 
The  discovery  of  gold  in  California  in  1849  greatly  increased 
the  monetary  reserves  of  the  country.6    Political  and  economic 


TABLE  No.  91.— BANKING  CONDITIONS  IN  THE  UNITED  STATES, 

1846-1860* 

(in  millions  of  dollars) 

Number  of  Specif 

Year                   banks             Loans             Deposits       Circulation  reserve 

1846 707                 312.1                   96.9                 10S.6  42.0 

1847 715                 310.3                   91.8                 105.5  35.1 

1848 751                 344.5                 103.2                 128.5  46.4 

1849 782                 332.3                   91.2                 114.7  43.6 

1850 824                364.2                 109.6                 131.4  45.4 

1851 879                413.7                 129.0                 155.2  48.7 

1852 992                 527.0                 189.0                 156.3  53.0 

1853 1,098                 408.9                 145.6                 146.1  47.1 

1854 1,208                  557.4                 188.2                 204.7  59.4 

1855 1,307                 576.1                 190.4                 187.0  53.9 

1856 1,398                 634.2                212.7                 195.7  59.3 

1857 1,416                 684.5                 230.4                 214.8  58.3 

1858 1,422                 583.2                 185.9                 155.2  74.4 

1859 1,476                 657.2                259.6                 193.3  104.5 

1860 1,562                691.9                 253.8                 207.1  83.6 

*  Compiled    from    "Financial    History   of   the    United    States,"   D.  R.    Dewey, 
p.  260,  with  slight  amplifications. 

9  The  gold  discoveries  in  California  were  almost  simultaneous  with  those  in 

Australia.     The    average    annual    production  of   gold   in    the   world  from    1492 

to  '"50  was  about  $9,000,000;  in  the  period  from  1851  to  1860  the  annual 
average  increased  to  $133,000,000. — "History  of  Modern  Banks  of  Issue,"  C.  A. 
Conant,   p.  637. 


250  BUSINESS  FORECASTING 

difficulties  in  Europe  caused  an  enormous  increase  in  immigra- 
tion to  the  United  States.7  Railroad  expansion  was  more  rapid 
than  the  growth  of  the  country.  In  the  nine  years  preceding 
1857,  over  20,000  miles  of  new  railroads  were  constructed;  in 
the  year  1856  alone,  3,642  miles  were  completed.8 

As  the  era  of  prosperity  continued,  business  activity  in- 
creased, and  prices  advanced.  A  fever  of  speculation  ensued 
and  the  demand  for  bank  loans  was  insatiable.  A  tightening 
of  the  credit  market  as  early  as  1854  gave  warning  of  the  ne- 
cessity of  the  curtailment  of  credit.  The  warning  passed 
unheeded,  however,  and  the  inevitable  crash  came  in   1857. 


TABLE  No.  92.— NEW  RAILROAD  MILEAGE  CONSTRUCTED   IN  THE 
UNITED  STATES,  1840-1900* 

Mileage  Mileage  Mileage 

Year  increase  Year  increase  Year  increase 

1840 516  1860 1,837  1880 6,711 

1841 717  1861 660  1881 9,846 

1842 491  1862 834  1882 11,569 

1843 159  1863 1,050  H83 6,745 

1844 192  1864 738  1884 3,923 

1845 256  1865 1,177  1885 2,975 

1846 297  1866 1,716  1886 8,018 

1847 668  1867 2,249  1887 12,876 

1848 398  1868 2,979  1888 6,900 

1849 1,369  1869 4,615  1889 5,162 

1850 1,656  1870 6,078  1890 

1851 1,961  1871 7,379  1891 4,844 

1852 1,926  1872 5,870  1892 3,656 

1853 *  2,452  1873 4,097  1893 4,143 

1854 1,360  1874 2,117  1894 2,899 

1855 1,654  1875 1,711  1895 1,895 

1856 3,642  1876 2,712  1896 2,053 

1857 2,487  1877 2,274  1897 2,163 

1858 2,465  1878 2,665  1898 2,026 

1859 1,821  1879 4,809  1899 3,466 

*  "Statistical  Abstract  of  the  United  States,"  1919,  p.  328. 


'"In  1845,  the  number  of  immigrants  to  this  country  was  114,000;  in  1847, 
225,000;  and  in  each  of  the  five  years  after  1849  it  was  more  than  350,000. 
More  immigrants,  in  fact,  came  between  1845  and  1855  than  in  the  preceding 
twenty-five  years. — "Financial  History  of  the  United  States,"  D.  R.  Dewey, 
p.  257. 

8  "History  of  Modern  Banks  of  Issue,"  C.  A.  Conant,  p.  637. 


THE  PRINCIPAL  AMERICAN  CRISES        251 


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PROSPERITY 

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252  BUSINESS  FORECASTING 

The  failure  of  the  Ohio  Life  Insurance  and  Trust  Co.  on 
August  24,  1857,  precipitated  a  panic.  Prices  dropped  de- 
moralizingly on  the  New  York  Stock  Exchange,  interest  rates 
mounted  enormously,  specie  payments  were  suspended  by  the 
Philadelphia  and  New  York  banks,  and  several  large  railroad 
companies  went  into  receivership.  As  is  usually  the  case  when 
economic  crises  develop  out  of  financial  difficulties,  the  crisis 
of  1857  was  not  long  continued.  By  the  end  of  the  year,  con- 
ditions had  regained  a  large  degree  of  stability. 

The  crisis  of  1873. — American  commerce  passed  through  tu- 
multuous days  between  1857  and  1873.  The  Civil  War 
which  lasted  from  1861  to  1865  left  many  perplexing  prob- 
lems in  the  form  of  a  tremendous  increase  in  the  national  debt, 
and  the  monetary  system  of  the  country  on  a  paper  basis.  The 
public  energies  turned  from  war  to  industry  with  such  vigor 
that  even  a  serious  panic  in  England  in  1866  failed  to  affect 
adversely  American  conditions.9 

Railroad  construction  in  the  years  following  the  Civil  War 
was  greatly  increased.  The  average  new  mileage  completed 
during  the  war  was  slightly  over  1,000;  in  1869,  it  increased 
to  4,953;  in  1870,  to  5,690;  in  1871,  to  7,670;  and  1872,  to 
6,167;  or  a  total  of  24,480  miles  in  four  years.  The  increase 
in  railroad  construction  naturally  brought  a  corresponding  gain 
in  iron  production,  and  in  industry  generally.  Production  was 
overstimulated  from  the  viewpoint  of  both  the  actual  require- 
ments and  the  financial  capacity  of  the  country. 

A  marked  stringency  developed  in  the  money  market  late  in 
1872  and  continued  with  increasing  emphasis  into  1873.  A 
few  small  bank  failures  early  in  September  were  followed  by 
the  failure  of  Jay  Cooke  and  Company — a  private  banking 
house  intimately  connected  with  the  Treasury  Department — 
on  September  18,  1873,  and  panic  ensued.  Bank  runs  com- 
pelled many  financial  institutions  to  close.  Industry  was  pro- 
foundly affected;  new  railroad  construction  decreased  to  2,117 
miles  in  1874  and  1,711  in  1875;  foundries  and  mills  prac- 
tically ceased  operations.  Business  prostration  continued  for 
six  years — one  of  the  darkest  periods  in  the  commercial  history 
of  the  United  States. 

The  crisis  of  1884. — The  economic  disturbance  of  1884  was 
of  short  duration.     It  is  attributable  almost  entirely  to  specu- 

'  May  11,  1866 — the  day  following  the  Overend,  Gurney   and  Co.  failure — has 
long  been  memorable  in  British  financial  history  as  "Black  Friday." 


THE  PRINCIPAL  AMERICAN  CRISES        253 

lative  causes.  European  crop  failures  resulted  in  a  heavy  de- 
mand upon  American  agricultural  production  with  the  result 
that  the  value  of  merchandise  exports  in  1881  was  nearly 
$1,000,000,000.  The  large  favorable  trade  balance  brought 
a  corresponding  increase  in  gold  imports  which  served  as  a 
basis  for  augmented  bank  loans.  Stringency  developed  rap- 
idly during  1884.  The  suspension  of  the  Marine  Bank  in 
New  York  on  May  5,  1884,  was  followed  by  several  smaller 
failures.  To  meet  the  currency  shortage,  local  banks  and 
clearing  houses  formed  associations  which  issued  "clearing 
house  certificates"  which  were  acceptable  in  lieu  of  cash.  The 
crisis,  which  was  chiefly  felt  by  the  stock  exchanges,  passed 
rapidly  and  by  the  end  of  the  year  equilibrium  had  been  re- 
established.10 

TABLE  No.  93.— THE  RATIO  OF  GOLD  TO  SILVER  ACCORDING  TO 
RELATIVE  MARKET  VALUES,  1840-1895* 

Ratio  of  gold  Ratio  of  gold 

Year  to  silver  Year  to  silver 

1840 15.61  1875 16.58 

1850 15.70  1876 17.87 

1860 15.29  1877 17.22 

1870 15.57  1878 17.94 

1871 15.57      1879 18.39 

1872 15.63      1880 18.04 

1873 15.92      1885 19.39 

1874 16.17      1890 19.77 

1895 31.57 

*  "Financial  History  of  the  United  States,"  D.  R.  Dewey,  p.  406. 

The  crisis  of  1893. — The  severe  business  depression  which 
developed  in  the  United  States  in  1893  was  caused  by  two 
outstanding  factors.  The  failure  of  Baring  Brothers  and 
Company  in  London  caused  British  nationals  to  regard  their 
foreign  investments  with  large  misgivings.  Although  the  in- 
vestments marketed  through  the  house  of  Baring  had  been 
principally  in  Argentine,  British  investors  were  led  to  restrict 
their  commitments  in  other  countries,  including  the  United 
States.  Up  to  this  time,  English  capitalists  were  content  to 
leave  their  investments  in  this  country  undisturbed  and  even 
reinvested  the  interest  payments.  As  a  result  of  the  Baring 
collapse,   however,   the  English  investors  began  to  withdraw 

W"A  Brief  History  of  Panics  in  the  United  States,"  C.  Juglar,  p.  102. 


254 


BUSINESS  FORECASTING 


their  commitments  which  required  that  large  gold  shipments 
be  made  from  this  country.  Another  reason  which  prompted 
this  action  was  the  bimetallic  policy  which  was  being  followed 
by  the  United  States  Government. 

Under  legislation  passed  in  1873,  the  United  States  went 
on  a  gold  monetary  basis.  The  Bland-Allison  Act  which  was 
passed  in  1878  attempted  to  restore  silver  on  a  bimetallic 
basis  with  gold  at  the  ratio  of  16  to  1  but  with  limited  success. 
The  silver  advocates,  disappointed  with  the  results  of  the  Bland- 
Allison  Act,  succeeded  in  passing  a  more  comprehensive  meas- 
ure in  1890  which  was  known  as  the  Sherman  Act.  The  at- 
tempt on  the  part  of  the  Government  to  keep  silver  on  a  mone- 

CHART  XXXVII.— RELATIVE  GOLD  AND   SILVER  PRICES:   1867-1899.* 


-SILVER,   1867-1899 
Price  of  Bar  Silver  ■ 

(in  London,  per  ounce  sterling,  0.015  fine.) 
R«tio  of  Gold  (o  Silrer 


*  From  "Financial  History  of  the  United  States,"  D.  R.  Dewey. 


tary  equality  with  gold  at  a  ratio  far  different  from  the  relative 
market  values  as  shown  in  Table  No.  93,  resulted  disastrously. 
Federal  gold  reserves  were  rapidly  depleted,  falling  from 
$190,000,000  in  1890  to  $80,000,000  in  1893.  Public  con- 
fidence in  the  monetary  situation  weakened,  and  reached  its 
lowest  ebb  when  the  British  Government  closed  the  mints  in 
India  to  the  free  coinage  of  silver  in  May  of  1893. 

The  uncertainty  in  the  monetary  situation  was  quickly  re- 
flected in  banking  and  industry  generally.     The  failure  of  the 


THE  PRINCIPAL  AMERICAN  CRISES        255 

Chemical  National  Bank  in  Chicago  on  May  9,  1893,  precipi- 
tated a  panic  which  became  country-wide.  With  credit  con- 
ditions extremely  stringent,  industry  soon  came  to  a  standstill.11 
The  repeal  of  the  Sherman  Act  on  October  30,  1893,  was  a 
belated  attempt  to  rectify  damage  which  had  already  been 
done.  Business  (Conditions  recovered  gradually  but  it  was 
close  to  1896  before  the  effects  of  the  crisis  had  definitely 
terminated. 

The  crisis  of  1907. — The  crisis  of  1907  ended  almost  as 
quickly  as  it  began.  The  cause  was  purely  financial.  Bank- 
ing was  still  being  conducted  under  legislation  passed  in  1863 
under  the  emergencies  of  war  times,  which  made  the  circulating 
currency  dependent  upon  the  volume  of  United  States  bonds 
outstanding.  The  banks  of  the  country  followed  a  policy  of 
independence  from  each  other  rather  than  one  of  interde- 
pendence. Under  reserve  legislation,  the  surplus  funds  of 
the  country  found  their  way  to  New  York  at  all  times  of  the 
year  except  at  the  harvests,  when  the  funds  were  withdrawn. 
Consequently  each  fall  found  credit  conditions  decidedly  strin- 
gent with  adverse  effect  upon  business  in  general. 

The  credit  situation  in  New  York  In  the  fall  of  1907  was 
more  difficult  to  handle  than  in  previous  years.  This  was  due 
to  the  increase  in  speculative  transactions  during  the  year  im- 
mediately preceding,  and  to  the  prevalence  of  credit  stringency 
abroad  as  well  as  at  home.  The  banks  found  their  cash  re- 
serves perilously  low  and  were  obliged  to  curtail  loans  and  to 
advance  interest  rates  to  extremely  high  points.  The  Knick- 
erbocker Trust  Company  failed  on  October  22,  1907,  and  this 
failure  was  followed  by  those  of  other  financial  institutions. 
The  banks  eventually  met  the  situation  by  issuing  clearing- 
house certificates  in  various  cities.  Moreover,  the  close  of  the 
harvest  brought  a  lessened  strain  upon  the  banks,  and,  by  the 
end  of  the  year,  the  critical  phase  was  passed. 

The  crisis  of  1920. — While  it  is  still  too  early  to  pass  defi- 
nite judgment  upon  whether  or  not  the  year  1920  will  go  down 
in  commercial  history  as  one  of  crisis,  the  situation  was  de- 

11  "The  production  of  coal,  both  anthracite  and  bituminous,  fell  off;  the  out- 
put of  pig-iron,  which  had  been  about  9,157,000  tons  in  1892,  fell  to  6,657,000 
tons  in  1894;  new  railway  construction  almost  ceased;  in  1894  there  were  156 
railways,  operating  a  mileage  of  nearly  39,000  miles,  in  the  hands  of  receivers; 
among  these  were  three  great  railway  systems, — the  Erie,  Northern  Pacific, 
and  Union  Pacific." — "Financial  History  of  the  United  States,"  D.  R.  Dewey, 
p.  446. 


256  BUSINESS  FORECASTING 

cidedly  critical  throughout  most  of  the  year.  The  beginning 
of  the  year  found  practically  all  commercial  indicia  registering 
new  high  records.  Prices,  wages,  bank  loans,  bank  deposits, 
foreign  trade,  commodity  shipments,  and  other  barometers  of 
business  reflected  unprecedented  activity.  Speculation,  en- 
couraged by  low  interest  rates,  had  increased  enormously 
throughout  1919.  The  credit  situation  had  stood  the  strain 
■satisfactorily  due  to  the  enormous  gain  in  gold  reserves  during 
the  early  years  of  the  World  War. 

The  Department  of  Labor  index  of  wholesale  prices  for 
January  of  1920  was  248  in  comparison  with  100  for  the 
entire  year  1913.  The  maximum  was  reached  in  May, — 272. 
Prices  declined  rapidly  during  the  last  half  of  the  year  as  is 
witnessed  by  the  index  of  189  for  December.  The  decline  in 
prices  was  accompanied  by  a  general  slackening  of  business 
activity  which,  however,  did  not  reach  its  lowest  point  until 
1921. 

The  reserve  ratio  for  the  combined  reserve  banks  on  Jan- 
uary 2,  1920,  was  43.7  per  cent,  or  fairly  close  to  the  legal 
minimum.  Federal  Reserve  notes  in  circulation  amounted  to 
$2,998,992,000  which  represented  almost  wholly  currency  ex- 
pansion in  the  United  States  during  and  following  the  war. 
The  low  ratio  prompted  the  banks  to  take  corrective  action 
early  in  the  year.  Discount  rates  were  advanced  in  January; 
the  increase  in  New  York  on  commercial  paper  was  from  4% 
to  6  per  cent.  The  plan  did  not  prove  immediately  efficacious, 
however.  The  ratio  continued  to  decline  and  reached  42.2 
per  cent  in  May.  Note  circulation  increased  constantly.  More 
drastic  action  was  then  taken.  Discount  rates  were  further 
advanced;  the  commercial  rate  in  New  York  was  increased 
to  7  per  cent.  Moreover  banks  adopted  a  policy  of  refusing 
loans  for  all  but  essential  purposes  in  order  that  credit  might 
be  conserved  for  the  most  beneficial  objects.  This  dual  policy 
was  strictly  enforced  throughout  the  remainder  of  the  year. 

The  cause  of  the  reaction  in  business  in  1920  may  be  found 
in  an  analysis  of  the  credit  situation.  As  long  as  credit  was 
freely  obtainable,  as  was  the  case  throughout  the  war  and  up 
to  the  beginning  of  1920,  prices  advanced  constantly  and  busi- 
ness was  abnormally  active.  When  it  became  apparent  early 
in  1920  that  credit  could  no  longer  be  indefinitely  expanded 
and  that  curtailment  was  necessary,  it  was  seen  that  reaction 
was    inevitable.      Bank    loans    were    no    longer    available    to 


THE  PRINCIPAL  AMERICAN  CRISES        257 

finance  foreign  trade,  or  to  withhold  commodities  from  the 
market,  or  for  any  purpose  other  than  essential  production. 
The  upward  trend  of  prices  was  checked  and  a  descent  of 
unprecedented  rapidity  ensued.  Labor  was  unwilling  to  ac- 
cept corresponding  reductions  in  wages,  and  industry  slackened 
as  a  consequence. 

The  end  of  the  year  found  conditions  extremely  quiet.  The 
extreme  activity  of  the  beginning  of  the  year  had  been  trans- 
formed completely.  Through  the  operation  of  the  Federal 
Reserve  system,  the  transition  had  been  accomplished  without 
a  panic  but  the  practical  effects  were  only  less  severe  than  had 
formerly  been  the  case. 


APPENDIX 
SOURCES  OF  BAROMETRIC  INFORMATION 

DAILY 

1.  Stock   exchange  quotations The  New  York  Times  (a 

2.  Commodity  exchange   quotations The  New  York   Times(a 

3.  Foreign   exchange   quotations The  New  York   Times  ( a 

4.  Interest  rates The  New  York  Times  ( a 

5.  Federal  finance    Daily  statement  of  Treasury  Department(b 

6.  Industrial  controversies  The  New  York  Times  ( a 

WEEKLY 

7.  Bank  statements   (Friday) Weekly  statement  of  Federal  Res.  Banks (b 

8.  Bank  clearings  (Saturday)  . .  .  .  The  Commercial  and  Financial  Chronicle  (c 

9.  Bituminous  coal  production   (Monday), 

Weekly  report  of  U.  S.  Geological  Survey  (c 

10.  Idle  cars  and  car  loadings   (irregular), 

Weekly  report  of  the  Car  Service  Division  of  the  Am.  Ry.  Assn.{b 

MONTHLY 

11.  New  security  issues  (1st) The  Journal  of  Commerce  (N.  Y.)  (c 

New  security  issues   (15th)...  The  Commercial  and  Financial  Chronicle(c 

12.  Pig  iron  production   (5th) Iron  Age{b 

13.  Business  failures   (5th) "Bradstreet's";   "Dun's  Review"(b 

14.  Agricultural  production   (10th), 

Monthly  Crop  Reporter  of  the  U.  S.  Dept.  of  Agriculture  (b 

15.  New  building  operations   (10th) "Bradstreet's";  F.  W.  Dodge  &  Co.(c 

16.  Wholesale  price  index    (10th) "Bradstreet's"  (b 

Wholesale  price  index    (15th), 

Monthly  Labor  Review  of  the  U.  S.  Dept.  of  Labor  (b 

17.  Gold  movements   (20th), 

Monthly  Summary  of  Foreign  Commerce  of  the  U.  S.  Dept.  of  Commerce(b 

18.  Foreign  Trade  (20th), 

Monthly  Summary  of  Foreign  Commerce  of  the  U.  S.  Dept.  of  Commerce(b 

19.  Wages   (15th) Monthly  Labor  Review(c 

20.  Railroad  net  earnings  (30th), 

Monthly  Reports  of  the  Interstate  Commerce  Commission (b) 

(a)  Information  appears  in  all  important  daily  newspapers. 

(b)  Original  sources;   information  is  reported  in  leading  papers. 

(c)  Original  sources;  not  generally  reported  in  newspapers. 

259 


INDEX 


(Reference  should  also  be  made  to  the  analytical  table  of  contents  at  begin- 
ning of  book.) 


Accuracy  in  forecasting,  4 
census  forecasting,  12 
crop   forecasting,   18 
life  insurance  forecasting,  9 
national  budget  forecasting,  15 
population  forecasting,  13 
weather  forecasting,   11 

Agricultural   production,   according  to 
states,  76 
barometer  of  business,  83,  230 
barometers  of,  59 

chart  showing  comparison  with  av- 
erage wholesale  prices,  81 
during  depression  period,  23 
during  period  of  prosperity,  33 
during  period  of  recovery,  28 
during  period  of  retrogression,  39 
influence  on  railroad  earnings,  60 
measurement  of,  59,  62 
relation  of  acreage  to,  76 
relation  of  price  to,  79 

Agricultural    products,    price    of,    and 
relation  to  prices  generally,  115 

Agriculture,   employment  in,   138 

American   Experience   Table   of  Mor- 
tality, 8 

Annalist  business  index  line,  238 

Astronomical  predictions,  6 

B 

Babson     Compositplot     of     American 
Business  Conditions,  237 

Bad  order  cars,  118 

Balance  of  trade,  131,  132 
settlement  of,  215 

Bank  clearings,  as  business  barometer, 
193 
as  financial  barometer,  188,  233 
barometric  limitations  of,  190 
chart  showing,  189 
during  period  of  depression,  26 
during  period  of  prosperity,  37 
during  period  of  recovery,  32 
during  period  of  retrogression,  42 
in  New  York,  significance  of,  190 


outside  New  York,  192 

trend  of,  191 
Bank  expansion  in  United   States,  248 
Bank  of  England,  computation  of  re- 
serve ratio  by,  203 

discount  rates  of,   211 
Bank  statements,  194 

as  barometer  of  business,  207 

barometer    of    financial    conditions, 
188,  233 

during  period  of  depression,  26 

during  period  of  prosperity,   37 

during  period  of  recovery,  32 

during  period  of  retrogression,  43 

national,  207 
Banking   conditions    in    United    States 

1846-1860,  249 
Barometer,  definition  of,  225 
Earometer    of    business,     agricultural 
production    as,    83,    230 

banking  clearings  as,  193 

bank  statements  as,  207 

building  permits  as,  94 

car  loadings  as,  120 

commodity  exchanges  as,  173 

commodity  prices  as,  115 

corporate  earnings  as,  156 

dividend  payments  as,  154 

employment  conditions  as,  139 

failures  as,  157,  159 

fiscal  operations  of  Treasury  as,  224 

foreign  exchange  as,  175 

foreign  trade  as,  121,  131 

gold  movements  as,  221 

idle  cars  as,  118 

immigration  as,  148 

in  general,  225 

industrial  controversies  as,  145 

industrial  production  as,  92 

interest  rate  as,  215 

new  security  issues  as,  163 

relative  value  of,  234 

retail  sales  as,  135 

stock  exchange   as,   171 

structural  production  as,  230 

transportation   as,   121 

wages  as,  143 


261 


262 


INDEX 


Barometer-s,  as  causes  and  effects,  227 

composite,  235 

fallibility  of,  227 

grouping  of,  234 

interrelationship  of,  228 

new,  actual  and  prospective,  238 

of  finance,  188,  233 

of  industrial  production,  83 

of  labor  conditions,  137,  232 

of  marketing,  99,  231 

of  production,  59,  230 

of  corporate  prosperity,  151 

of  the  exchanges,  164,  232 
Barometric    information,     sources    of, 

258 
Barometric  progress  in  the  future,  240 
Barometric  summary,  225 
"Bear"  market,  meaning  of,   165 
Bills    discounted    by   Federal    Reserve 

Banks,   196 
Bituminous  coal,   production  of,  87 
Bland-Allison  Act,  254 
Bogart,  E.  L.,  cited,  122 
Bradstreet's  index  number,  100,   103 
Brookmire,  James  H.,  cited,  62 
Brookmire's  Forecaster,  237 
Budget  estimates,   14 

verification  of,   15 
Building  materials,  chart  showing  rel- 
ative wholesale  prices  of,  110 
Building   permits   as   business   barom- 
eter, 94 
"Bull"  market,  meaning  of,  165 
Burton,  T.  E.,  cited,  23 
Business  cycle,  20,  43 

chart  showing,  21 

divisions  of,  22 
Business,  stages  of,  22 


Call  loans,  definition  of,  215 
Call  money  rates,  212 
Car  loadings,  29,   120 
Cash  reserves  of  Federal  Reserve,  196 
Census  forecasting,  12 
Chart  showing  annual  production  and 
December   1    price   of  corn,   65; 
cotton,  74;  wheat,  68 
balance    of    gold     movements    of 

United    States,   218 
bank  clearings  in  United  States,  189 
business  cycle,  21 

comparison  of  agricultural  produc- 
tion with  average  wholesale 
prices,  81 


comparison  of  wholesale  prices  and 

wages,  144 
course  of  stock  market,  169 
effect  of  prevailing  prices  upon  acre- 
age planted  to  winter  wheat,  77 
failures  in  United  States,  160 
Federal    Reserve    notes    in    circula- 
tion, 199 
foreign  trade  of  the  United   States, 

124 
immigration  into  United  States,  147 
interest  rates  on  commercial  paper, 

213 
pig  iron  production  in  United  States, 

91 
railroad      construction      in      United 

States,  251 
relative   wholesale   prices   of  build- 
ing materials,  110 
chemicals,   111 
clothing,  107 
farm  products,  105 
food,   106 
fuel,   108 

house  furnishings,   112 
metals,  109 
trend  in  prices  of  coffee,  183 
copper,   187 
corn,  179 
cotton,   179 
pig  iron,  187 
rubber,  187 
sugar,   183 
wheat,    179 
wool,  183 
trend  in  volume  of  idle  freight  cars, 

119 
wholesale    prices    in    United    States, 
101 
Chemicals,     chart     showing     relative 

wholesale  prices  of,   111 
Clark,  John  B.,  cited,  54 
Clearing   system   of   Federal    Reserve, 

191 
Clearings    (see  Bank  Clearings) 
Clothing,      chart     showing      relative 

wholesale  prices  of,   107 
Coal,  production  of,  87 
Coffee,  chart  showing  trend   in   prices 
of,   183 
prices  for  ten  years,   181 
Commercial    paper,   interest   rates   on, 

212 
Cofnage  Act  of  1834,  248 


INDEX 


263 


Commodity  exchanges,  172 
as  barometer  of  business,  173 

spot  prices  on,  176,  177,  178,  180, 
181,  182,  184,  185,  186 
Commodity  prices,  99 
Composite  barometers,  235 
Conant,  C.  A.,  cited,  247,  249,  250 
Construction,  94 

during  period  of  depression,  24 
during  period  of  prosperity,  34 
during  period  of  recovery,  28 
during  period  of  retrogression,  40 
Consumers'   goods,   definition   of,   52 
Copeland,   M.  T.,  cited,  239 
Copper,  prices  for  ten  years,  186,  187 
Corn,   acreage,   production   and  value, 
67 
chart    showing     annual     production 

and  December  1  price,  65 
chart    showing    trend    in    prices    of, 

179 
crop  losses,  66 
.harvesting  of  crop,  66 
information    contained    in    Govern- 
ment reports  on,  63 
prices  for  ten  years,  177 
production   of,   63 
Corporate  earnings,  barometer  of  busi- 
ness, 151,  156,  232 
during  period  of  depression,  25 
during  period  of  prosperity,  36 
during  period  of  recovery,  31 
during  period  of  retrogression,  42 
Cost  of  living,  133 
Cost  of  production,  effect  on  price,  46 

estimation  of,  49 
Cotton,  acreage,  production  and  value, 
78 
chart    showing    annual     production 

and  December  1  price,  74 
chart    showing   trend    in    prices    of, 

179 
closing  prices  of,  on  June  10,  1921, 

172 
condition  of  crop,  75 
countries  producing,  73 
crop  losses,  75 

dates  of  issuance  of  reports  on,  63 
Government  reports  on,  73 
percentages   harvested  monthly,   76 
prices  for  ten  years,  178 
production  of,  73 
Credit   conditions,   barometer   of,   207, 
233 


Credit,     relationship     to     periods     of 

prosperity  and  depression,  52 
Crises  and  panics,  39 

principal  American,  245 
Crisis  of  1837,  247 

1857,  249 

1873,  252 

1884,  252 

1893,  253 

1907,  255 

1920,  255 
Crops,  effect  upon  business,  62 

forecasting,  17,  18 

losses,   80 

reports,  62,  79 

D 

Davenport,  H.  J.,  cited,   50 
Debt  of  the  United  States,  222 
Deflation    and    Inflation,    see    Bank 

Statements 
Demand,   definition   of,  47 

effect  upon  price  of  changes  in,   53 

estimation  of,  47 
Department   of   Labor    index   number, 

100 
Depression  period,  causes  of,  53 

bank  clearings  during,  26 

bank  statements  during,  26 

characteristics  of,  23 

construction  during,  24 

corporate  earnings  during,  25 

failures  during,  26 

financial  conditions  during,  26 

foreign  trade  during,  24 

gold  movements  during,  27 

immigration  during,  25 

interest  rates  during,  27 

labor  conditions  during,  25 

marketing  during,  24 

new  security  issues  during,  26 

prices  during,  24 

production   during,  23 

retail  sales  during,  25 

stock  market  during,  26 

wages  during,  25 
Dewey,  D.  R.,  cited,  246,  247,  250,  254 
Discount,  exchange  at,  174 
Discount    rate    of    Federal    Reserve 
banks,  210 

of  Bank  of  England,  211 
Dividend  payments  barometer  of  busi- 
ness, 154 
Dividend     record    of    Pennsylvania 
Railroad,  155 


264 


INDEX 


of  United  States  Steel  Corporation, 
156 

E 

Earnings,  barometers  of,  232 

of    corporations,     as    barometer    of 

business,  156 
of  industrials,  as  barometer  of  busi- 
ness, 153 
of  public  utilities,   as  barometer  of 

business,   153 
of  railroads,   as  barometer  of  busi- 
ness,  153 
of  United  States  Steel   Corporation, 
154 
Economic  forces  in  business,  20 
Employment     conditions,     as    business 

barometer,  139 
Employment  by  railroads,   152 
Employment,  problem  of,  137 
Estimating  death  claims  in  life  insur- 
ance, 7 
Estimating    national    budget    require- 
ments, 14 
Exchanges,  barometers  of,  164,  232 
commodity,   172 
functions  of,  164 
Exports  of  merchandise,   125,  127,   128 


Failures,   barometer   of  business,   157, 
159,  232 

causes  of,  157 

chart  showing,   160 

during  period  of  depression,  26 

during  period  of  prosperity,   36 

during  period  of  recovery,  31 

during  period  of  retrogression,  42 

relationship    of    number    to    number 
in  business,   158 

relationship  to  amount  of  liabilities, 
158 

table    showing    number    in    United 
States,  159 

trend  of,  158 
Farm    products,    chart    showing    rela- 
tive wholesale   prices  of,   105 
Federal    Reserve    banks,    bills    dis- 
counted by,  196 

cash  reserves,  196 

clearing  system,   191,   193 

discount  rates  of,  210,  211 

gold  holdings  of,  200 

notes  in  circulation,  198,  199 

reserve  ratio,  201 


reserve  accounts  of  member  banks, 

196 
statement,   194 
statement  of  condition  of,   197 

Federal   Reserve   system,   statement  of 
retail   sales  issued  by,   134 
panics  under,  205 

Finance,  barometers  of,   188,  233 

Financial  conditions  during  period  of 
depression,  26 
during  period  of  prosperity,   37 
during  period  of  recovery,  32 
during  period  of  retrogression,  42 

Fisher,  Arne,  cited,    5 

Fisher,   Irving,   cited,    32,   115 

Fluctuations  of  business,  20 

Food,   chart   showing   relative   whole- 
sale prices  of,   106 

Forecasting,   accuracy  in,  4 
crops,    17 
in  business,  225 
in  life  insurance,  7 
national  budget  requirements,  14 
population,  12 
weather  conditions,  10 

Foreign  exchange,  barometer  of  busi- 
ness,   175 
barometer  of  conditions  abroad,  233 
causes  of  fluctuations  in,  175 
effect  of  domestic  conditions  on,  174 
functions  of,  174 

Foreign  trade,  121,  125 

as   a  business  barometer,    131 
barometer  of  marketing,  231 
during  period  of  depression,  24 
during  period  of  prosperity,  34 
during  period  of  recovery,  29 
during  period  of  retrogression,  40 
imports  of  United  States,  130 
of  United  States,  chart  showing,  124 
visible   and  invisible  items,  215 

Foresight  in  business,  3 

Franc,  par  value,  175 

Frozen  credit,  43 

Fuel,   chart    showing   relative    whole- 
sale  prices  of,  108 

"Futures,"  meaning  of,  172 


Gold    holdings    of    Federal    Reserve 

banks,  200 
Gold   movements,  215 

as  barometer  of  business,  221 

balance  of,  216 

chart  showing  balance  of,  218 


INDEX 


265 


during  period  of  depression,  27 

during  period  of  prosperity,  37 

during  period   of   recovery,  32 

during  period  of  retrogression,  &Z 

financial   barometer,  188 

significance  of,  234 

since  1914,  217 
Gold,    nations    holding    large    stocks, 
217 

production,   219,   220 

ratio  to  silver,  253 

world's  supply  of,  219 
Government  crop  reports,  62,  63 

cotton  reports,  62 

wheat  reports,  69 

H 

Harvard  University  Committee  on 
Economic  Research,  92,  237 

Harding,  Gov.  W.  P.  G.,  cited,  206 

Hinks,  A.  R.,  cited,  226 

Holmes,  Justice  O.  W.,  cited,  18 

Hoover,  Herbert,  cited,  240 

House  furnishings,  chart  showing  rel- 
ative wholesale   prices  of,   112 

Huebner,  S.  S.,  cited,  173 

I 

Idle  cars,  117,  118 

chart  showing  trend  in  volume  of, 
119 
Immigration,  146 

as    barometer    of    labor    conditions, 
232 

as  barometer  of  business,  148 

chart  showing,  147 

during  period  of  depression,  25 

during  period  of  prosperity,  35 

during  period   of  recovery,   30 

during  period  of  retrogression,  41 

effect  upon  industrial  conditions,  148 

Restriction  Act  of  1921,  150 

statistics  of,  149 
Imports,  89,  129 
Index  numbers,   100 

Bradstreet's,   100 

Department  of  Labor,  100 

of  production,  96 

of  wages  per  hour,  141 
Industrial  controversies,  as  barometer 

of  business,  145 
Industrial  earnings,   153 
Industrial    production,    barometer    of 
business,   83,   92,  230 

during  period  of  depression,  24 

general  index  of,  96 


measurement  of,  59 
sources  of  information,   90 
Industrial    stocks,    average    prices    of 
twenty-five,   170 
significance  of  prices  of,  168 
Inflation     and     deflation,     see     Bank 

Statements 
Insurance,  forecasting  in,  7 
Interest  rates,  209,  212 
barometer  of  business,  215 
barometer    of    financial    conditions, 

188,  234 
during  period  of  depression,  27 
during  period  of  prosperity,  37 
during  period  of  recovery,  32 
during  period  of  retrogression,  43 
on  call  loans,  212 

on   commercial    paper,    chart   show- 
ing, 213 
on    60-90    days    commercial    paper, 
212 
Interrelationship    of    business    barom- 
eters,  228 
"Invisible"  items  of  foreign  trade,  122, 

215 
Iron  and  steel  industry,  83 
Iron,  chart  showing  production  of,  91 
chart    showing   trend    in    prices    of, 

187 
prices  for  ten  years,  185 
production  in  United  States,  84 

J 

Johnson,  Joseph  French,  cited,  44 

Jones,  E.  D.,  cited,   30 
Juglar,  C,  cited,  253 

K 
Kelly,  F.  C,  cited,  14 

L 
Labor  conditions,   barometers  of,   137, 
232 
during  period  of  depression,  25 
during  period  of  prosperity,   35 
during  period  of  recovery,  30 
during  period  of  retrogression,  41 
Labor    controversies,    145 

as   business   barometer,    146 
Labor,  extent  of  employment  in  man- 
ufacturing,  83 
Law  of  causality,  5 
Liabilities  of  failures,   relationship  to 

number,  158 
Life  insurance,  forecasting  in,  7 
use  of  mortality  table  in,  8 


266 


INDEX 


Liquidation,  period  of,  see  Retrogres- 
sion 
Lire,  par  value  of,  175 
Lough,  W.  H.,  cited,  246 
Loveman,  Amy,  cited,  19 

M 
Manufactured     commodities,     exports 

of,  128 
Manufacturing,   employment  in,   83 
Marketing,  barometers  of,  99,  231 
during  period  of  depression,  24 
during  period  of  prosperity,  34 
during  period  of  recovery,  28 
during  period  of  retrogression,  40 
Marshall,    Matthews,    cited,    39 
Mathematics  of  probabilities,   5 
Member    banks,    statement    of    condi- 
tions of,  206 
Metals,  chart  showing  relative  whole- 
sale prices  of,  109 
Mitchell,  W.  C,  cited,   19,  28,  29,  38, 

45,  60,  100,  115 
Money  economy,  influence  of,  44,  54 
Money,  functions  of,  44 

in  circulation  in  United  States,  201 
Moore,  Henry  L.,  cited,  12,  24 
Mortality  table,   8 
Moulton,  H.  G.,  cited,  115 

N 

National  bank  statements,  207 

National   banks,  table  showing  condi- 
tion of,  208 

Nelson,  S.  A.,  cited,  168 

New  security  issues,   161 

as  barometer  of  business,  163,  232 
during  period  of  depression,  26 
during  period  of  prosperity,  36 
during  period  of  recovery,  31 
during  period  of  retrogression,  42 
table  showing,  162 
trend  in,  162 

"Normal"  meaning  in  crop  reports,  62 

Notes  in  circulation,  198 
table  showing,  202 

Noyes,  Alexander  D.,  cited,  171 


Panics   and   crises,   39 

Panics  and  the  Federal  Reserve  sys- 
tem, 205 

Panics,  history  of,  in  United  States, 
245 

Par  value  of  currencies,  determination 
of,  175 


Pearl,  Raymond,  cited,  14 
Pennsylvania  Railroad,  dividend  rec- 
ord of,  15 
Persons,  W.  M.,  cited,  92 
Pig    iron,    chart    showing    trend    in 
prices  of,    187 
production  in   United  States,   84,   91 
Population   of   United    States,   rate   of 
growth  in,  13 
table   showing   actual    and   prospec- 
tive, 14 
Pound,  par  value  of,  175 
Premium,  exchange  at,   175 
Prices  and  wages,  142 
Prices,  a  barometer  of  marketing,  231 
a  barometer  of  business,  115 
chart    showing    comparison    with 

wages,  144 
chart   showing   index   number   of, 

101 
chart  showing  comparison  of   agri- 
cultural production  with,  81 
chart    showing    relative    wholesale 
prices    of    commodities,    105    to 
112 
decline  in,  during   1920-1921,   113 
definition  of,  44 
determination   of,  46 
determination  on  exchanges,  165,  172 
diagram   showing  analysis  of,  47 
during  period  of  depression,  24 
during  period  of  prosperity,  33 
during  period  of  recovery,  29 
during  period  of  retrogression,  40 
effect   of   demand    and    supply   esti- 
mates on,  51 
fluctuations  in,  104 
of  commodities,  99 
on  exchanges,  168 
of  coffee  for  ten  years,  181 
of  copper  for  ten  years,  186 
of  corn  for  ten  years,  177 
of  cotton  for  ten  years,  178 
of  industrial   stocks,  significance  of, 

168 
of  pig  iron  for  ten  years,  185 
of  rubber  for  ten  years,  184 
of  sugar  for  ten  years,  182 
of  wheat  for  ten  years,  176 
of  wool  for  ten  years,  180 
relation  to   agricultural    production, 

79 
relation   of   farm   product   prices  to 

general,   115 
why  they  rise,  51 


INDEX 


267 


Producers'  goods,  definition  of,   52 
Production,  barometers  of,  59,  230 

effect  of  seasonal   variations  on,  90 

estimating  cost  of,  49 

during  period  of  depression,  23 

during  period  of  prosperity,  33 

during  period  of  recovery,  28 

during  period  of  retrogression,  39 

limitations  upon,  49 

subordination  of,  45 
Profit,  definition  of,  44 
Profits,  barometers  of,  232 
Prosperity,  bank  clearings  during,   37 

bank  statements  during,   37 

barometers  of,   151 

borrowing  during  period  of,  162 

characteristics  of,  33 

construction  during,  34 

corporate   earnings   during,   36 

failures  during,  36 

financial  conditions  during,  37 

foreign  trade  during,  34 

gold  movements  during,  37 

immigration  during,  35 

interest  rates  during,  37 

labor  conditions  during,  35 

marketing  during,  34 

new  security  issues  during,   36,  162 

prices  during,  34 

production  during,  33 

retail  sales  during,  35 

stock  market  during,  36 

transportation  during,  34 

wages  during,  34 
Public  utility  earnings,  153 

during  period  of  depression,  26 
Purchasing    power,     effect    upon    de- 
mand, 48 


Railroads,    construction    during    1840- 
1890,   250,   chart,   251 

employment  by,   152 
Railroad  earnings,  152,  153 

influence  of  agriculture  on,  60 
Ratio  of  gold  to  silver  1840-1895,  253 
Recovery    period,    carloadings   during, 
29 

characteristics  of,   27 

construction   during,  28 

corporate    earnings    during,    31 

failures   during,    31 

financial   conditions  during,  32 

foreign  trade  during,  29 


gold   movements   during,  32 

immigration  during,  30 

interest  rates  during,  32 

labor  conditions  during,  30 

marketing  during,  28 

new  security  issues  during,  31 

prices  during,  29 

production   during,  28 

retail  sales  during,  29 

stock  market  during,  31 

transportation   during,  29 

wages  during,  30 
Reserve    accounts    of    member    banks, 

196 
Reserve  ratio,  201 

by  districts,  203 

computation    by    Bank    of   England, 
203 

significance  of  changes  in,  203 

table  showing,  204 
Retail   prices,  index  number  of,   100 
Retail  sales,   133 

barometer  of  business,  135 

barometer  of  marketing,  231 

during  period  of  depression,  25 

during  period  of  prosperity,  35 

during  period  of  recovery,  29 

during  period  of  retrogression,  41 

Federal   Reserve  statement  of,   134 

stores  reporting,  134 
Retail  trade,  condition  of,  136 
Retrogression    period,    bank    clearings 
during,  43 

bank  statements  during,  43 

characteristics  of,  38 

construction  during,  40 

corporate   earnings   during,   42 

failures  during,  42 

foreign  trade  during,  41 

financial  conditions  during,  42 

gold  movements  during,  43 

immigration  during,  41 

interest  rates  during,  43 

labor  conditions  during,  41 

marketing  during,  40 

new  security  issues  during,  42 

prices  during,  40 

production   during,   39 

retail  sales  during,  41 

stock  market  during,  42 

transportation  during,  40 

wages  during,  41 
Rubber,  chart  showing  trend  in  prices 
of,   187 

prices  for  ten  years,   184 


268 


INDEX 


Scrip  dividends,  danger  signal,  157 
Seasonal  variations,  influence  on  pro- 
duction,  90 
Secular  trend  and  seasonal  variations, 

90 
Security  issues    (see   new   security   is- 
sues) 
Shares  traded,  number  and  price,  166 
Sherman  Act,  255 
Short  sales,  164 
Sielcken,  Herman,  cited,  173 
Silver,  ratio  of  gold  to,  253 
Simpson,  Kemper,  cited,   50 
Smart,  Wm.,  cited,  56 
Snyder,  Carl,  cited,  92 
Sources  of  barometric  information,  258 
"Spot"  prices,  172 
Stages  of  business,  22 
Steel   and  iron  industry,  83 
Steel,    unfilled    orders,    barometer    of 

business,  87 
Steiner,  W.  H.,  cited,  239 
Stock  exchange,  barometer  of  business, 
171 
prices  on,  168 
transactions  on,   165 
volume  of  transactions  on,  166 
Stock  market,  chart  showing  course  of, 
169 
during   period   of   depression,   26 
during  period  of  prosperity,   36 
during  period  of  recovery,  31 
during  period   of   retrogression,   42 
Stocks,    average    price    of    twenty-five 
industrial,   170 

suggested    list    for    barometric 
use,  168 
Stourm,  Rene,  cited,  15,  17 
Strike  statistics,   145 
Structural   production,  93 

barometer  of  business,  94,  230 
Sugar,  chart  showing  trend   in   prices 
of,   183 
prices  for  ten  years,  182 
Supply,   determination   of,  46 
limitations  upon,  49 
regulation  of,  48 


Table    showing     acreage,    production 
and  value  of  corn,  67 
acreage,    production    and    value    of 
cotton,  78 


acreage,    production    and    value    of 

wheat,  72 

American  experience  of  mortality,  8 

average  price  of  twenty-five  indus- 
trial stocks,  170 

balance  of  gold  movements,  216 

bank  clearings  outside  New  York 
for  ten  years,  192 

bank  expansion  in  United  States, 
248 

banking  conditions  in  United  States, 
1846-1860,  249 

banking  progress  in  United  States, 
195 

Bradstreet's  wholesale  index  num- 
ber, 103 

building  permits,   95 

call  money  rates,  214 

closing  prices  of  cotton  on  June  10, 
1921,  172 

comparison  of  employment  Febru- 
ary 1921,  January  1921,  Feb- 
ruary 1920,  139 

condition  of  corn  crop,  64 

condition  of  cotton  crop,  75 

condition  of  national  banks,  208 

condition  of  retail  trade,  136 

condition    of    winter    and    spring 
wheat,  70 

corn  crop  losses,  66 

cotton  crop   losses,   75 

daily  statement  of  United  States 
Treasury,  223 

decline  in  wholesale  prices,  1920- 
1921,   114 

Department  of  Labor  index  number, 
104 

discount  rates  of  Federal  Reserve 
Banks  and  Bank  of  England, 
211 

dividend     record     of    Pennsylvania 

Railroad,   155 
dividend    record    of    United    States 

Steel  Corporation,  156 
exports    of    manufactured    products 

in  United  States,  128 
exports  of  United  States,   127 
Federal    Reserve    notes    in    circula- 
tion, 202 
foreign  trade  of  United  States,   123 
gold    holdings    of    Federal    Reserve 

banks,  200 
immigration  into  United  States,  149 
imports  of  leading  commodities,  130 
imports  of  United  States,  129 


INDEX 


269 


imports  of  raw  materials,  89 
index    number    of   wholesale    prices 

in  United  States,   102 
index   number   of   wages   per    hour, 

141 
indices  of  production   and  trade,  98 
interest  rate  on   60-90  day  commer- 
cial paper,  212 
interrelationship    of    business    bar- 
ometers, 228 
money    in    circulation    in    United 

States,   201 
monthly  balance  of  trade  of  United 

States,    132 
nations  holding  large  gold  stocks  in 

1919,  217 
net  earnings  of  railroads,  153 
net  earnings  of  United  States  Steel 

Corporation,   154 
new  security  issues,  162 
number  of  failures  in  United  States, 

159 
operation  of  Federal  Reserve  clear- 
ing system,   193 
percentages  of  corn  crop  harvested 

monthly,  66 
percentages  of  cotton  crop  harvested 

monthly,    76 
percentages  of  wheat  crop  harvested 

monthly,  71 
population     of     United     States,     ac- 
tual  and   prospective,   14 
prices  of  coffee  for  ten  years,  181 
prices  of  copper  for  ten  years,  186 
prices  of  corn  for  ten  years,  177 
prices  of  cotton  for  ten  years,  178 
prices  of  pig  iron  for  ten  years,  185 
prices  of  rubber  for  ten  years,  184 
prices  of  sugar  for  ten  years  182 
prices  of  wheat  for  ten  years,  176 
prices  of  wool  for  ten  years,  180 
production      and     exportation      and 

wheat,  69 
production  of  bituminous  coal,  88 
production    of    pig    iron    in    United 

States,  85 
production  of  gold,   220 
public  debt  of  United  States,  222 
railroad   mileage    1840-1900,   250 
rate    of    growth    of   population    in 

United  States,  13 
ratio   of  cash   reserves   to   Federal 

Reserve  notes  and  deposits,  204 
ratio   of   gold    to   silver,    1840-1895, 
253 


relationship    of    farm    products    to 
other   commodities,    116 

relative    production    of    winter    and 
spring  wheat,  71 

shares    traded    and    average    price, 
167 

shares   traded   on   New   York   Stock 
Exchange,  166 

statement    of    condition    of    Federal 
Reserve    banks,    197 

statement  of  condition   of  reporting 
member  banks,  206 

unfilled  steel  orders,   86 

value   of   United   States   farm  crops 
according  to  States,  79 

verification  of  American  experience 
table  of  mortality,  9 

verification    of    estimates    of    reve- 
nues of   United   Kingdom,   15 

verification  of  estimates  of  revenues 
of  United  States,  16 

verification  of  weather  forecasts,  11 

verification    of   winter   wheat    fore- 
casts, 18 

weekly  car  loadings,   120 

wheat  crop  losses,  71 
Taxes,  possibility  of  reduction  in,  221 
Tides,   prediction   of,   6 
Transportation,   a  barometer  of  busi- 
ness,  118,  121 

barometer  of  marketing,  231 

during  period  of  depression,  24 

during  period  of  prosperity,   34 

during  period  of  recovery,  29 

during  period  of  retrogression,  40 

idle  car  statistics,  117 
Treasury  Department  operations,  188, 
221 

barometer  of  business,  224 

barometer    of    financial    conditions, 
234 

U 

Unfilled  steel  orders,  86 
United  States,  public  debt  of,  222 
United  States  Steel  Corporation,  divi- 
dend record  of,  156 
net  earnings  of,  154 
unfilled  orders  of,  86 
United    States   Treasury,   table    show- 
ing daily  statement  of,  223 


Veblen,  T.  B.,  cited,  23,  51 
"Visible"  items  of  foreign  trade,  215 


270 


INDEX 


w 

Wages,   141 

Wages  and  prices,   142 
Wages,   as  barometer  of  business,  143 
barometer  of  labor  conditions,  232 
chart  showing  comparison  of  prices 

with,   144 
during  period  of  depression,  25 
during  period   of  prosperity,   35 
during  period  of  recovery,  30 
during  period  of  retrogression,  41 
Weather  forecasts,   10 

table  showing  verification  of,   11 
Wheat,  acreage,  production,  value,  72 
chart     showing     annual     production 

and   December   1   price,   68 
chart    showing    effect    of    prevailing 
prices  upon  acreage  planted,  77 
chart    showing    trend    in    prices    of, 
179 


condition  of  winter  and  spring,  70 

countries  producing,  69 

crop  losses,  71 

government  reports  on,  69 

per  capita  consumption  of,  73 

percentages  harvested   monthly,   71 

prices  for  ten  years,  176 

production  of,  66 

relative    production    of    spring    and 

winter,   71 
table    showing    production    and    ex- 
portation, 69 
Whitehead,  A.  N.,  cited,  5,   17 
Wholesale    prices,    index    number    of, 

100 
Williams,  J.  S.,  cited,  210 
Wool,   chart  showing  trend   in   prices 
of,   183 
prices  for  ten  years,  180 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

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This  book  is  DUE  on  the  last  date  stamped  below. 


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